When you are struggling to keep up with payments on your debts, a loan can seem like a solution: all too often it can be just one more problem. This article helps you assess whether a loan will be the right solution for your present situation.
A consolidation loan is marketed as a simple and convenient way to gather and control all your debts. The key distinction between these and most other personal loans is that they are secured, which means the lender has the right to force a sale of your house to recover the debt if you do not keep up the payment. By using a consolidation loan to pay off credit cards, for example, you are turning a low-risk unsecured debt in to a high-risk secured debt. And if you don't change your lifestyle and spending habits, particularly by stopping using the cards, you simply increase what you owe, but additionally put your home at risk.
ADVANTAGES
- Quick and easy to arrange
- Monthly payments are reduced
- Rates appear low compared to the Credit Card rates
DISADVANTAGES
- You are not required to change your spending habits!
- The loan is secured on your property
- The interest rate is much higher than other secured debt, ie your mortgage
Long-term, the risks can be huge - if your house is reposessed, then it will almost certainly be sold at less than its market value as the loan company is only interested in covering its debts, leaving you homeless, with less assets and a poor credit history which may take years to rebuild.
If consolidation loans required you to use the money to pay off debts, and then to follow that up with closing the credit card accounts, then they might be an appropriate method of converting a number of debts in to one visible amount, but as this is not the case they need to be treated with great caution.
And one obvious point - the television adverts make a point of stressing how easy and friendly the whole process is - of course it is, you are talking to a sales person who really wants to lend you money. They may be nice people too, but their key interest, quite naturally, is in their business, their sale and their commission. Do NOT confuse a sales person with a nonprofit debt advice service!
BETTER OPTIONS
- Negotiate an extension to your mortgage, but only if you are ceasing to use the credit cards that you wish to pay off
- Negotiate an agreed payment scheme with existing lenders, rather than adding another company to the list
