Consolidation Loans Explained

Sometimes, it can be all too easy to let your debts spiral out of hand. One day, you may realise that your financial problems have mounted to a …

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Sometimes, it can be all too easy to let your debts spiral out of hand. One day, you may realise that your financial problems have mounted to a degree that you’re unable to combat. You’re paying out a significant sum every month to multiple providers, with interest payments costing you almost as much as repayments.

In this situation, some people find that the best solution for them is to consolidate their debts. This means that you take out a loan large enough to repay all of your existing debts, thus consolidating them in one place and ensuring that you’re only paying one lot of interest.

Who Can Consolidation Loans Help?

There are many in Britain who may find consolidation loans beneficial. The truth is that our country is a nation of debtors, owing a combined sum in excess of £1.43 trillion. At the end of November 2013, it was calculated that the average household has a personal debt of £54,000 – double what it was a decade ago.

These substantial debts are often owed to more than one lender, and it is in these scenarios that consolidation loans could be helpful in reducing debt to one manageable monthly payment.  

What Are Consolidation Loans?

Debt consolidation loans, such as those offered by Nemo Personal Finance, are not hard to understand, although many people are unfamiliar with the concept. In their most basic form, consolidation loans are simply a lump sum that allows debtors to pay off existing debts and transfer the amount they owe into one loan and, ergo, a single monthly repayment. Remember that a Nemo loan is secured against your home, so you must be able to afford the monthly repayments before considering this as an option.

Although they cannot reduce your overall debt, they could decrease your monthly outgoings and your rate of interest, as well as allowing you to spread the cost of repayments out over a more substantial time period. Thus, they can help to make debts more manageable for those who are struggling.

Possible Benefits of Consolidation Loans

Consolidation loans can have a number of benefits for those who do their research to establish that a consolidation loan is the right fit for them.

For those who are careful to manage their spending they can:

Reduce Monthly Payments

Consolidation loans will usually increase the term over which the borrower must repay their debt, and in doing so they can help to reduce monthly repayments to a more manageable sum.

Improve Credit Rating

As they make payments more manageable, debt consolidation loans can help you to improve your credit rating. This is because they can make paying off the loan a more achievable goal. If you can reach this, and then manage not to accrue any similarly large future debts, you could find that your credit rate improves greatly.

Reduce the Interest Paid

Depending upon the original loans, you may find that the interest you pay is excessively high. Where this is the case, reducing interest to a single loan can really help to shrink the amount you pay each month.

Possible Risks of Debt Consolidation Loans

Of course, perfect solutions to your money problems rarely exist, and as with any type of borrowing, debt consolidation loans have risks attached to them.

You May Pay More in the Long Run

Consolidating your debt means extending the repayment term of the loan, and the longer you pay for, the more interest you’re likely to owe. Thus, even though monthly interest payments might become more manageable, this does not mean that you will pay any less interest over the course of the borrowing period.

You’ll Be Extending the Repayment Period

Although extending the repayment period can make loan repayments more manageable, some people prefer to pay more each month in order to clear their debt more quickly. This is a personal preference, but knowing that you’re likely to be in debt for longer is something that you need to consider carefully before taking out a consolidation loan.

You May Be Required to Use Your Property as Security

Often, consolidation loans are offered as secured loans, as this reduces the lender’s risk. As a result, this can make them unsuitable for those who are really struggling, as failing to meet loan repayments means that you risk repossession.

When deciding whether a consolidation loan could help you, it’s incredibly important to take the time to weigh the many associated advantages and disadvantages listed above, and to assess how they relate to your individual situation before making any decisions. Be sure to consider these carefully to ensure you find the right solution for you.

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