Debt Consolidation Loans Explained

By paying off any outstanding balances on existing loans, store or credit cards and overdrafts, debt consolidation loans enable you to condense all of your monthly outgoings into a single payment. Although you will still be responsible for paying the total amount back, you may be able to pay a lower rate of interest and spread the loan over a longer period making your monthly payments more manageable.

This can be particularly advantageous for those who only pay the minimum monthly balance on each of their commitments as paying debts in this way does not reduce the overall amount owed but simply covers interest payments. By condensing your monthly outgoings using a debt consolidation loan, the fixed monthly repayments will include a percentage of the total amount owed as well covering interest payments, resulting in a monthly decrease in the remaining amount.

Another advantage of a debt consolidation loan is that the interest rate applied to the condensed amount is likely to be significantly lower than that charged on store and credit cards. This means that by simply moving the amount you owe to a borrowing facility with a lower interest rate, clearing your debts will be much simpler.

The interest charged on your debt consolidation loan will depend on the amount you need to borrow to clear all other remaining debts (larger amounts tend to attract a lower interest rate) as well as your personal circumstances and credit history (those with a better credit history are likely to receive a lower rate).

Lenders may be more willing to offer a secured debt consolidation loan to those with a poor credit history as this provides a guarantee for their investment. However, although these may be a good option for those who want to condense a large amount of debt, it is important to remember that if you do not keep on top of the repayments your home may be at risk.