Types of Debt

There are various benefits to bringing together the money you owe into just one loan consolidation. For most people it is attractive to have to make just a single monthly payment rather than many payments. Making many payments to a different creditors in respect of a number of different accounts is time consuming, especially when cash is tight and there is too little money for everyone. You have to decide which obligations really are ‘priority’ ones. All of these you must pay. For the rest simply have to make do with whatever you are able to afford to repay, even when in some cases it is lower than the contractual amount of money that you ought to pay. I huge advantage – whether perceived or actual – is that you simply have just one creditor to cope with instead of numerous lenders. Taking care of your finances as well as payments is usually simple. It is additionally probable that your credit score may ameliorate particularly if you include your complete credit card accounts in the consolidation. In addition to these advantages, the actual regular monthly monthly payment on the loan consolidation can be lower than the total amount of the payments relating to the variety of loans.

Why should this be? One factor is that the term of the consolidation loan may be (much) longer than the various terms of the original loans. A second factor is that you may have agreed to allow the consolidation loan to be secured on your property. Lower monthly repayments are usually based on one or both of these factors. While the interest rate on the proposed consolidation loan may be lower that the rate you are paying on (some of) your accounts at present, the total amount you will have to repay could be considerably increased due to the length of the term of the consolidation loan.

So what might not work out? If you are finding it difficult to make your monthly payments currently it is advisable to just be sure you can without difficulty make the debt consolidation loan payments in a sustainable way and also for the whole planned term of that loan. You ought to quit using the lines of credit which you have consolidated. For instance, you ought to cut up all the credit cards you had and quit making use of whatever overdraft facilities or other credit facilities which generally contributed to your financial difficulties in the first place. Once you have paid off all your accounts and credit cards using the proceeds of the loan consolidation, you will notice that your ‘old’ creditors might choose to do more business with you and make all types of ‘attractive’ credit offers to you. It is best to refrain from such deals, if you wish to avoid having financial problems again.

Another disadvantage of taking out a consolidation loan is that you may be persuaded to agree to secure the consolidation loan on your property. If you are unable to keep up the repayments (on the consolidation loan) you may lose your property. While you may achieve a low interest rate by agreeing to secure the loan on your property, the likely long term of the consolidation loan means that you give up some flexibility relating to your mortgage e.g. being mortgage-free when you expected to be or being able to retire early or when you had planned to retire.

So, do think long and hard before you decide on debt consolidation as a solution for your financial difficulties. Consider whether other options may be more appropriate to your circumstances. For example you may already be insolvent. If you are you might consider entering into an Individual Voluntary Arrangement (IVA) or petitioning for your own Bankruptcy (BCY). These are two personal insolvency processes that protect you from your creditors and that have the full weight of the law behind them. Even if you are not insolvent, you might consider entering into a Debt Management Plan with your creditors. You can do this yourself by reaching agreement with each of your creditors as to how you will repay your debts to them. This is sometimes called a self administered Debt Management Plan. Most Debt Management Plans however are administered with the assistance of specialist debt management companies with expertise in negotiating with creditors and in setting up Debt Management Plans between consumers and their creditors and then administering these plans over a period of years and in some cases over many years. Whatever you ultimately decide to do, do take advice. Do not assume that debt consolidation is the answer to your situation until you have become aware of the other options which may be open to you and have fully considered them.

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