Here are the basic workings of a debt consolidation loan... Firstly, the borrower (maybe you?) needs to have debts for which they would like to pay a lower interest rate and possibly stretch out over a longer term. These are the popular requirements. By doing either of these things (and especially by doing both) monthly payments on the new loan will be lower than on the old. Possibly the new payments will be sustantially lower.
But please remember to do your maths. It may be that though you have taken a payment of 100 per month down to 50 per month (or whatever), by adding ten years to the term of the loan, you have actually taken your total repayments from, say 5,000 to 6,500. The numbers will be different for every individual situation, obviously, but I'm sure you see my point.
Having applied for, and been offered a loan with this new lender, the client will then arrange to use the new loan to repay one or more of the old loans. These might be store cards, credit cards, car finance or whatever and so this can represent quite a monthly saving.
There is however a down side. For example, lets look at a car loan. You use your debt consolidation loan to repay car finance. Car finance is notoriously expensive and so this may be a notable monthly saving. The loan many people use is a remortgage (a loan secured on their home). Suddenly, your three or four year car loan is now going to be stretched out over another 19 (or whowever many) years. You will then still be paying for your car long after you have forgotten what colour it was!! This makes less financial sense. A lot less. But, people do it all the time. Tomorrow may never come...
Essentially, there are two types of debt consolidation loan: secured and unsecured.
Stuart Langridge is an International Financial Planning Consultant to expatriates who has a background in the UK mortgage market. He has helped hundreds of families with debt issues and now writes about it instead. You can find more of his work at: www.FreeFinancialGuide.net |
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