DEBT CONSOLIDATION

What is a debt consolidation loan?

A debt consolidation loan is a single loan that can be used to pay off multiple existing debts. These debts may have been incurred through personal loans, credit cards, overdrafts, or may represent any number of unpaid bills that have built up over time.

For instance, if you borrowed $6,000 towards buying a car and had run up a further $4,000 on your credit and store cards, these bills could be 'consolidated' into a single loan for $10,000. By doing so, it's possible to lower what you pay each month as the interest rate for a debt consolidation loan will be much lower than that charged by credit and store card companies. In some cases, it may also be possible to extend the length of the repayment period.

Why consolidate debt?

For one thing, paying off one large sum of money rather than lots of smaller debts is easier to manage. You only have to remember to make one repayment each month, rather than trying to juggle and keep track of several different ones.

Will it save me money?

Consolidating debt can be an effective solution if you have accumulated a lot of high-interest debt through an assortment of credit cards, store cards, personal loans, in fact any type of debt that you are struggling to pay back. A debt consolidator will combine and repay all existing debt with one single loan, usually at a better interest rate, which means that monthly repayments are reduced and you are able to pay back the money you owe sooner.

Debt consolidation loan is not a magic wand that will make your debts vanish. The money is still owed, what's changed is that your debt now takes the form of one loan with one monthly repayment. Effectively, a debt consolidation loan offers the opportunity of a fresh financial start.

What are the risks?

If you are paying off credit card and store card debt by consolidating it into one single loan, in effect you will be swapping your unsecured debt for what is likely to be secured debt. The repercussions of missing repayments on a secured loan are much more serious than with unsecured debt, as instead of risking card repossession and a poor credit rating, you are now also running the risk of losing your home.

What you should know looking for debt consolidation loan?

If you're in the market for a debt consolidation loan look for one which offers a fixed interest rate. You then know exactly what you have to pay monthly and will be able to budget more effectively. It's also be a good idea to pay by direct debit from the bank account into which your wages or salary are paid.

Obtaining a debt consolidation loan is dependent on your credit rating. If your credit rating is not all it should be, it may prove difficult to get one of the cheaper consolidation loans. Even so, you may still save money.

As usual, the message is shop around. But in order to do so, let's list the most important questions to ask:

* What is the interest rate and APR, and are they variable?
* What is the overall cost of the loan?
* How much do I pay each month?
* What happens if I miss a payment?
* Are there penalties if I wish to repay early or switch provider?
* Is the loan secured on my house, and if so what happens if I miss a payment or want to move?