First of all; what is debt consolidation and why do people do it?
To consolidate means; to bring together or to group
So the idea of debt consolidation is to gather all your individual pieces of debt e.g. overdrafts, credit cards, car finance, hire purchase, catalogue accounts, etc. and replace them all with one loan.
That’s the what so what about the why?
Mainly for two reasons;
It’s much easier to manage one payment every month than many payments. You know how much and when that one payment will leave your account so you know how much you need to have in your account and by when it needs to be there to cover the payment. I’m sure many a responsible debtor has forgotten about the long-since destroyed credit card whose direct debit just so happens to be a few days after the rest of the monthly direct debits and causes the holder to incur a rather nasty unauthorised overdraft fee, not to mention the blip on their credit rating should they not be able to pay it until the next month!
Undeniably then, the simplicity of having one payment is especially appealing to those with multiple debts to maintain.
2. To save money
As well as the simplicity of a single payment, grouping all your debts into a single, larger one, can sometimes mean you pay less interest as the rate for a loan or mortgage can often be much lower than that which you are consolidating. You may also want to increase the term [length] of the debt-consolidation-loan or mortgage to further reduce your monthly out-goings.
So I suppose you’re thinking “Gee-whiz! Debt consolidation sure sounds great, where do I sign?”
The more cynical amongst you may be thinking “Not so fast there buddy. Where’s the catch?”
Well, here they are…
- If you take your debt-consolidation-loan over a longer period to reduce your monthly payments, then by the time you’ve paid off the loan you could end up paying more in interest than if you hadn’t consolidated in the first place. Even if the interest rate is lower than that of which you are consolidating! This is especially true if you consolidate your debt into your mortgage as the term of a mortgage is usually much longer than other types of loan.
- If you use a mortgage or secured loan to consolidate your debt then you could be securing previously unsecured debt against your home! This means if your financial circumstances should change in the future then the added “weight” of the debts you have consolidated could cause you to get into arrears with your mortgage and in the worst case scenario, cause you to lose your home through repossession.
- There is also the risk of temptation. If your monthly payments after consolidating your debts are much lower than before, you may be tempted to spend again on your credit cards, store cards or catalogue accounts.
If you are considering consolidating your debts into a loan or mortgage because you’re experiencing financial difficulties and finding it hard to keep up with the repayments on your debts, then the first thing you should do is speak to your creditors [those you have borrowed from] to see if there’s anything they can do to help you.
And finally, consider taking out an Accident, Sickness and Unemployment insurance policy. Many will allow you to protect more than just your mortgage each month so should you fall upon hard times you needn’t have to miss payments on your other credit commitments or household bills whilst you are out of work.
For futher information or help with anything mentioned in this post please contact us via our main website – www.mmmortgages.co.uk