A debt consolidation loan is credit taken to consolidate a person’s debts into one convenient monthly payment. Often people have debts spread out over multiple platforms. It makes sense to instead make one easy monthly payment to a single source.
That depends entirely on personal circumstances. What suits one person won’t suit another. Debt consolidation loans are well-matched for those in employment but who have multiple debts. If you struggle on a month-by-month basis to make the required repayments they could be right for you. That’s as long as you appreciate the pros and cons of consolidating debts and the revised expectations.
The switch to a single consolidated loan can often result in lower monthly interest charges compared to maintaining multiple credit lines.
You will make a monthly payment that will often be lower.
The convenience of one single creditor to make payments to.
By consolidating debts, you are opening up new lines of credit.
Depending on what debt you consolidate, there is the possibility of triggering early settlement charges – for example on a loan that you move across.
A debt consolidation loan may come with broker fees/charges, as part of their commission structure.
Total repayments on a consolidated loan may be greater, especially if the borrower selects a longer repayment period.
Your assets may be at risk – if your debt consolidation loan is secured against one of your asset such as your home or a vehicle, this asset will be at risk if you fail to make repayments.
The big draw of a debt consolidation loan is that it writes off all other debts without harming your credit rating, as you have not altered your initial agreement with creditors, nor written off debts by never paying them. However, for larger debt consolidation loans, the credit may have to be secured against an asset of considerable value, which puts you in further difficulties if you struggle to keep up with repayments thereafter.
The most common type of debt our customers look to consolidate is that of their credit card. This is why these type of loans are sometimes referred to as ‘credit card refinancing loans’. It makes a certain amount of sense. This is especially when you consider that the Representative APR on credit card purchases in the UK (as stated in the UK Cards Association September 2015 Report) is almost 18%. Loans with Moolr should carry loan rates of a third of that. The difference in interest rates is stark.
What’s more, one of the big killers for those with large credit card balances is making only the minimum repayment amount each month. Credit card providers often encourage this, with short-term 0% APR offers and/or setting very small repayment minimums. It can thus deflect a borrower’s focus away from paying off the capital balance as quickly as possible. Instead, people often choose to use funds on other things.
This, in turn, leaves them stuck in this cycle of debt for longer, paying more and more in interest, and ultimately filling the pockets of credit card companies while leaving a big hole in their own. A personal loan provider, on the other hand, would generally offer a robust monthly amount devoid of such temptations, ensuring that you pay off your debt quicker and save a lot more in interest in the long run as a result.