What Is Debt Consolidation And Who Should Consider It?

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What Is Debt Consolidation And Who Should Consider It?

Debt consolidation loans the UK merges multiple debts under a single payment, customers with manageable debt and good credit history use consolidation as a tool for planning their finances and keeping a check on losing excessive money to high-interest loans. Consolidated loans combine several high-interest unsecured liabilities like credit card bills and loans under a single scheme that is offered at a much lower interest rate. Consolidation can effectively reduce the total debt and help in the identification of ways to reduce the burden quickly.

Individuals have manageable loans, but looking for ways to avoid multiple high-interest bills and different due dates, debt consolidation is an effective approach to keep the accounts clean.

Working on the debt consolidation

Typically debt consolidation is offered in two ways; both schemes consolidate the debt payment into a unified monthly bill. The customer must have an excellent credit score and repayment history to be eligible for debt consolidation.

Additional ways of availing debt consolidation include getting home equity loans or personal loans, both of which are high-risk propositions. Home equity loans keep the borrower's home as collateral; the house gets taken over by the lender if the debt is not paid back on time. Under all circumstances, the credit score and financial profile of the borrower is evaluated along with the calculation of debt to income ratio. Some financial organizations provide free tools to their customers that they can use for calculating their eligibility for availing debt consolidation loans.

When should one consider taking debt consolidation loans?

For planning a successful consolidation strategy, the following tips should be kept in mind

  • Total existing debt excluding secured loans must not be more than 40% of total income
  • Must be eligible for 0% credit card bill or debt consolidation loans at very low interest
  • Must avoid taking loans to add up with the existing ones
  • There must be a constant cash flow for covering payments of existing loans

Let us take an example for a better understanding, if a customer has multiple credit cards with interest rates ranging between 17 to 24% and he makes regular payments of his bills without fail. He might be eligible for getting an unsecured consolidated loan for about 7% interest which will reduce his expenses considerably.

Most people take consolidation to reduce their debt burden without affecting their credit profile. Paying the minimum amount on credit card bills will simply add on to their debt that will eventually take months or years to cover up. The customer will also be responsible for pay a higher interest rate during this tenure.

When should one avoid debt consolidation?

It must be understood that debt consolidation is not a solution for paying off several high-interest loans instantly. Debt consolidation loans the UK is not a solution to the excessive spending habits of some customers that eventually get tangled with multiple debts. Individuals who are inundated by debts and will not be able to sustain even with the reduced interest rate on monthly payment should strictly avoid consolidating their loans.

If the existing amount is small and the borrower will be able to clear the debt in the next six months, only a marginal amount of savings can be obtained after consolidation. It is always recommended to have a strategic method of clearing debts before applying for one. Individuals struck with debts that are greater than half of their income should always avoid consolidating loans and look for other alternatives to effectively manage their financial profile.

Advantages and disadvantages of consolidating with a secured loan

Consolidating unsecured loans can be a huge risk for the borrower if not evaluated properly. When an asset is provided as collateral is always at risk if the borrower fails to pay back the loan on time. Assets like retirement funds and insurance policies are not returned to the customer if the loan is not cleared. However, secured loans are offered at low-interest rates and monthly payments that make the payment process a lot more affordable.

Pros and cons of consolidating with an unsecured loan

Unsecured loans are the most regular choice of customers for their easy availability. Customers with a fine credit history are only eligible for this kind of loans that help them in the process of consolidating multiple bills into a unified loan. It also gives the borrower peace of mind as none of their assets are at risk. Getting an unsecured mortgage for debt consolidation can be quite difficult if the borrower does not have an outstanding credit history. Interest rates are also much higher than secured loans.

Debt consolidation loans UK can be beneficial but one must always be careful about factors like interest rate, repayment period, cash flow, credit score, and future goals and liabilities. Evaluation of these factors will prevent potential borrowers from losing their money and incurring additional debts before the consolidated loan cycle is over.