When a Debts Consolidation Loan Makes Sense
Are you having trouble maintaining your monthly budget due to overwhelming debt? Do you find yourself using credit cards to pay household bills more often than you should? If so, you are not alone. There are people experiencing the same trouble all over Britain, people who might benefit from a debts consolidation loan arranged by using equity as collateral. Consolidation is something you should at least consider among your other options.
Understand that debt consolidation is not the right solution for everyone. But if your circumstances meet generally accepted guidelines, a debts consolidation loan from a bank or building society could be the answer you are looking for. Keep reading to learn more.
Five Conditions of Feasibility
According to the Money Advice Service, taking out a debts consolidation loan makes sense if your circumstances meet the following five conditions:
1. Your Indebtedness Will Not Increase
One of the advantages of debt consolidation is that it pays off higher interest debts without increasing the amount of money you owe. So logically, this would be the first condition. Debt consolidation is only practical if you can pull it off without increasing your debt load.
Let's say you are applying for a debts consolidation loan with a 10% interest rate and a 10-year repayment period. The total amount of money you would pay on this loan may exceed what you currently owe, making it not worth getting. However, a five-year loan at 3% could end up costing you less in the long term. That would be a good loan to get.
2. The Interest Rate Will Be Lower
Interest accounts for the majority of the cost of borrowing. A debts consolidation loan only makes sense if the interest your bank is offering is less than what you are currently paying on the debt you want to consolidate. A higher interest rate will cost more regardless of how long it takes you to repay. So do not accept a consolidation loan with a higher interest rate.
3. Your Income Will Support the Loan
The average consolidation loan is taken out using equity in your home as collateral. Therefore, debt consolidation only makes sense if you have the income to support the loan until it's paid off. If your finances are too tight to guarantee sufficient income, don't borrow. Taking out a debt consolidation loan and then not being able to repay could result in your home being repossessed.
4. Your Goal Is to Cut Back Your Spending
If you are planning to get a debt consolidation loan with the parallel goal of cutting back your spending, you're on the right track. The whole reason for debt consolidation is to regain the control previously lost by excessive indebtedness. It would make no sense to regain financial control, keep spending like you always have, and then find yourself back in the same situation again.
5. You Can Afford Potential Fees and Charges
Lastly, some of the outstanding debt instruments you want to consolidate may assess early repayment fees. Make sure you can afford to pay any such fees up front. If you cannot, be careful about rolling those fees into your debts consolidation loan, as doing so could ultimately cost you more.
Debt consolidation can be a very good financial tool when used correctly and under the right circumstances. If you are struggling to pay off your debt and you have a home with equity, consider a debts consolidation loan. You might discover it is the perfect tool you need to get out of debt and get your financial house back in order.
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