Consolidation Loans

When you’re juggling payments and struggling with large monthly repayments a consolidation loan may seem like the solution.

A consolidation loan usually means your debts are rolled into one amount which is spread over a longer term and reduces the monthly payment. This seems like the logical way to deal with debt and it doesn’t have a negative affect on your credit rating.

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However at Money Advice & Debt Help we believe that taking out a loan is not an effective way to clear debt and research has shown that in the long term people usually end up with more debt and with greater problems.

Whilst a consolidation could be right for some it is important to bear in mind the downside as well:

• Whilst a consolidation could mean a lower interest rate than a store or credit card over the period of the loan it is likely that you will pay more interest back. The average consolidation lasts over 7 years.

• The rates on personal loans have soared since the banking crisis began. Even with an excellent credit rating you can now expect to pay well over 10% APR.

• The availability of loans has fallen dramatically. The banks are now far more choosey about whom they lend to and even if you can get a loan the amount you can borrow will probably be much less.

• Although the government is introducing legislation to combat PPI mis-selling the banks still pressurise their loan customers into buying Payment Protection Insurance (PPI). This is often expensive and in some cases unnecessary. The competition commission has concluded that the banks overcharge their PPI customers by almost £1.5 billion a year. When you add the cost of PPI to a loan (often interest is charged on this sum) it can push up the APR considerably and mean that payments are far less affordable.

• In general loans are not very flexible and if you get into difficulty the banks are often not very sympathetic. Circumstances can change unexpectedly and if this happens monthly payments can suddenly become unaffordable. Whilst the banks may be willing to offer some support over the long term it is likely that you will be harassed for payment and your credit rating destroyed.

• If you decide to take out a secured loan (they often have a slightly lower rate) then you are eating into the equity in your home and also risking repossession if you cannot afford the repayments.

Alternatives to a consolidation loan

At Money Advice & Debt Help we specialise in clearing debt quickly and can reduce your monthly repayments considerably. By freezing interest and charges a Debt Management Plan (DMP) could actually be a quicker way of clearing your debt.

We may even be able to negotiate with your creditors on your behalf and arrange for the majority of your debt to be written off. Our free debt test will consider all your options (including a loan) and recommend the best way to clear your debt.

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