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Amalgamating your debts into one monthly payment sounds attractive but
don't rush into it. Here are the issues you need to consider first
There can’t be a single person reading this article who, at some
stage, has not wished there were easier ways to pay off their debts.
Sometimes it’s less about the amount we owe or how much we have
to pay to service those debts than the fact that we end up paying a bewildering
number of different organisations – including banks, credit card
firms, HP companies – every month.
Wouldn’t it be so much easier to simply amalgamate what we owe,
get a deal which costs us less every month and simply pay it all off to
a single source?
Every year, hundreds of thousands of people have the same idea. Research
earlier this year by the Office of Fair Trading (OFT), the consumer debt
watchdog, found that in 2002, more than £40 billion of secured and
unsecured lending was used for debt consolidation.
This compares with an estimated £21 billion in 1999. In addition,
researchers Mori Financial Services found that about 15% of last year’s
£16 billion credit card balance transfers – where you get
a 0% credit card deal – involved consolidation of more than one
credit card balance into a single card.
You can find the full OFT report at its www.oft.gov.uk website (this
link takes you directly to the report in a pdf document)
In short, the desire to consolidate loans is a massive and growing phenomenon.
Whether it is the best way to deal with your debts is another matter.
What types of debt consolidation are there?
A variety of credit products can be used including:
Unsecured loans, where you go to a bank or another lender and borrow
a sum of money to pay off all other loans. Because the loan is unsecured,
you do not risk losing your home in the event of a default.
If you need a loan, use this MSN Money finder to help you
If you want to see what you could save by consolidating your existing
debts into one cheaper loan MSN Money has a handy debt consolidator tool
that will work it out for you.
Try the debt consolidator tool now
An advance from an existing mortgage provider secured against property,
but leaving the original mortgage intact. You are simply borrowing more
money form the same lender and your home is as much at risk as it was
before.
A “second charge” mortgage (a loan secured on property, from
a lender other than the existing mortgage provider, that leaves the first
charge mortgage in place). Here, the second charge lender waits in the
queue in the event of a default and grabs its slice of debt after the
“first charge” lender has been paid back.
Re-mortgaging a property and borrowing more in the process. You go to
a new lender and borrow more money, based on the rising equity in your
house. Here, there is the potential to get a better deal at the same time.
To find the best remortgage deal, click here
Transferring various credit balances to a credit card (including the use
of credit card cheques to pay off non-credit card debts).
If you want to find a 0% credit card, click here to see rates from MSN
Money’s handy service
The benefits of consolidation
The potential advantages of debt consolidation over multiple
credit agreements can be:
Lower interest rates
Lower monthly payments
Having to deal with only one creditor
The disadvantages of consolidation
Many people don’t realise that there can be costs involved.
The costs of settling an existing loan, such as redemption penalties,
and arranging a new one (possibly including broker commission) can be
significant.
Here is an article I wrote that explains some of the charges that can
be levied on loans
Debt consolidation loans often have lower monthly payments because the
debt is spread over a longer period of time and because it may be secured
on property, so lowering interest rates. But your home is at risk in the
event of default – and you often pay more interest overall.
Many loan providers tend to “piggyback” payment protection
insurance (PPI) on their loans, smetimes without borrowers understanding
what they are paying for. Such cover is usually far more expensive than
can be obtained by shopping around. Usually, interest is added on the
cost of the cover as well as the loan itself, making the entire loan much
more expensive.
The OFT’s research found that most borrowers do not shop around
for credit for debt consolidation, although this can save money –
two thirds of borrowers who consolidated debts obtained information from
only one provider before going ahead.
Moreover, many borrowers, particularly those in financial distress, are
unaware of other alternatives which are open to them, such as negotiating
with creditors themselves or getting help from free debt counselling services.
Most borrowers do not give enough weight to factors such as the length
of the term of the loan and the total cost of repayments when deciding
whether debt consolidation makes financial sense for them.
Before you take out a loan
Here are some issues you should be considering before taking out a debt
consolidation loan:
What the alternatives are. These can include re-negotiating existing
payments on your debts with individual creditors.
What the interest rate and APR is and whether it is variable – many
“consolidators” don’t offer fixed rates.
What the overall cost of the loan is, including exactly how much interest
will be repaid over the full repayment period.
What the monthly repayments are and whether they include insurance.
Whether there are additional features which will change the rate at which
the capital sum is paid back, for example non-payment.
What happens if you want to repay or refinance early: many lenders will
impose a series of redemption penalties for doing so and some are more
expensive than others. In some cases, a penalty applies not only in respect
of the loan itself but also of the insurance premiums that you would no
longer have to pay.
If the loan is secured on your home, what the consequences of not keeping
up with payments might be and what happens if you want to move. Some lenders
will insist on their loans being repaid in full before you move.
Should you take out a consolidation loan?
Borrowing more money to get out of debt is rarely a good option in and
of itself. It often saddles the borrower with even greater debts, incurred
when paying off previous loans.
There may be an argument in favour of some consolidation options, for
example using a 0% credit card in cases where you can transfer debts without
penalty.
And increasing a mortgage may be a way out for some people who feel they
need a simplified long-term repayment approach. But it will almost certainly
come at the cost of more interest payments.
For most debt problems, a sensible debt repayment plan, agreed with your
creditors, is likely to offer a better long-term solution.
The issue in that case is not so much consolidation but dealing with
debt. Here is an article to help you do that
If you have difficulties in getting a loan of any sort, you may have
what is called “impaired credit” problems.
The logic of all this is that, wherever possible, you should avoid companies
that offer seemingly-simple consolidation options.
Where to go for more help
There are plenty of organisations offering free advice on how to deal
with debts. Here are some of them:
Insolvency Helpline at www.insolvencyhelpline.co.uk
National Debtline at www.nationaldebtline.co.uk
Consumer Credit Counselling Service at www.cccs.co.uk
mortgages
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