Debt consolidation continues to grow in popularity as more and more people fall into debt and realise the savings they can make from consolidating multiple debts into one lower more manageable repayment. Debt consolidation is a straight forward concept. You first assess all your existing debts. Most people will have a number of outstanding debts from various sources such as credit cards, bank overdrafts, car loans and more. These will all be charged at different interest rates but because of the nature of the debts, the rates charged are generally quite high. For example some credit cards carry APR exceeding 20%, Car finance can carry interest rates in excess of 10% and more.
What debt consolidation does is allows you to take out one loan that will be enough to pay off all these other outstanding debts leaving you with just the consolidation loan to repay which will have a lower interest rate then that of the combined loans before consolidation. Added to this you have the convenience of knowing that you only have to make one payment each month and you know before hand how much it is so your budgeting will be much easier as a result.
Security Required
Consolidation loans are usually available on a secured basis. This means you need some sort of asset, such as a house, to secure the loan over. If you do not have security, then it will be much harder for you to acquire a consolidation loan. Therefore, for the vast majority of consolidation loans, you will need to be able to offer some sort of security in exchange for the loan.
Guarantors
If you are not a home owner and therefore are unable to offer such a home as security for the loan, there are alternative ways of going about getting a consolidation loan. You may have close family members who are willing to step in and guarantee the loan. E.G., if they have their own home, they can agree to allow the loan to be secured over their home instead of yours.
This means that they will be liable for your repayments on the loan in the event that you fail to maintain the repayments. Other options may be to get an unsecured loan. However this is likely to be difficult for a number of reasons. The main one being that unsecured loans are seen by lenders to be far more risky, and generally if you are seeking a debt consolidation loan, you have a significant mount of outstanding debt already and will be considered too much of a credit risk by lenders. Therefore, in the absence of either a personal guarantor, or some sort of security such as a home, it will be very difficult for you to get a consolidation loan.
Getting The Cheapest Loan
The reason debt consolidation loans are so much cheaper than other loans, and therefore manage to save you so much in interest payments, is mainly due to the fact that it is secured over your property. While it is very advantageous to be paying lower interest rates, you should carefully consider the risks involved with guaranteeing credit over your home. The main risk is that if, for whatever reason, you become unable to repay the loan, you will be putting your home at risk. Secured loans give the lender a direct right to come in and take your property from you if you become unable to meet your repayment obligations.
So, for example, if you secure a loan over your home and then fail to make the loan repayments, then the lender will be able to legally take possession of your home and sell it in order to get back the amount you owe them. The balance will be returned to you, however, if you have children or other family obligations, you will not really be in a position to take these types of risk with your home and should therefore consider very carefully if you will be able to meet the repayments on any loan you are advanced.
The other reason that secured loans will save you so much is because the loan is less flexible than credit cards and other such short term loans. The loan will be for a set amount spread over a specific period. For example, you could borrow ten thousand to be repaid at a certain interest rate, say seven per cent, over five years.
