From mortgages and vehicle loans to personal loans and credit cards - the majority of Britons carry some form of debt - and this isn't a necessarily a bad thing, as most "financial experts" will have you believing.
Debt can help us acquire assets such as a home, a commercial property and a vehicle to help us get around. It can make the otherwise impossible - possible, by providing us with the money we need to get a university education, quit the nine-to-five and start a business, improve our homes, organize a wedding or take our family on vacation. On a smaller scale, credit cards and payday loans can offer us access to emergency money when the unexpected happens or when we simply don't have enough to make it through the month.
How Debt can Spiral out of Control
That being said, when multiple debts are taken out to pay for the necessary things in life, to pay for the things we desperately want or to tide us over during difficult times - debts can quickly add up to startling figures. When we combine this with all the day-to-day expenses that the average person encounters as well as household bills, insurance costs, petrol and food - debts and expenses can merge into one big monster that's seemingly impossible to contain. This is particularly true for those who take on multiple forms of unsecured credit - such as vehicle or personal loans, payday loans and store and credit card debts. These debts may be smaller than their long-term counter-parts but, the interest rates and APR's will generally exceed those you pay on, for instance, your mortgage and, when combined, can really add to an alarming number.
Overwhelmed by Debt? What you Should do First
When an excessive amount of unsecured debt is coupled with poor budgeting and planning - many people will find themselves in a very bad debt situation. The most important thing to do in such a situation is to contact your creditors and inform them of your situation - chances are that they will be more than willing to help you work out a new, more affordable repayment plan - but, unfortunately most people choose to ignore the letters and calls they receive because, they believe, they'll somehow be able to "catch up". They will likely begin to miss payments on their debts and bills, incur heavy non-payment penalties and eventually become so overwhelmed by debt that they have no choice but to try to find a way out.
Bankruptcy vs Debt Consolidation
Many people consider filing for bankruptcy but, there is a much less drastic and, more effective solution to improving your debt situation. This "way out" is known as debt consolidation and, although you've certainly heard this term before, chances are high that you've encountered highly confusing and contradictory information. Let's try to see if we can demystify debt consolidation and help you understand when and, under what circumstances, it could serve you well and, offer you a chance to lessen the burden of excessive debt. It's crucial to note that debt consolidation isn't for everyone and, if undertaken without careful consideration and, utmost prudency, it can worsen your debt problem. The majority of debt consolidation loans are secured, usually against the borrowers home and, if repayments are not met - you may risk losing your home in a nasty repossession.
How Debt Consolidation Works and How it can Help
Debt consolidation is, as the term implies, a way to consolidate existing debts. This is done by gathering settlement figures on all your unsecured debts, combining them and applying for a new debt that covers the combined total. This loan will, ideally, serve three purposes - firstly, it will lower the total monthly repayment amount - since the new loan will have a longer loan term, secondly, it will reduce the chances of mismanaging your repayments and missing scheduled instalments, thereby making your debt easier to manage and thirdly, if the loan is secured against your home, you will likely receive a lower interest rate offer and therefore, a lower APR - saving you money. The third purpose is the rarest, since in many instances, your unsecured debts will carry early repayment penalties since most people that opt for a debt consolidation loan will have already missed several payments. By missing payments you not only incur severe penalties but, you inadvertently cause damage to your credit history and, lower your credit score - which is what lenders use to work out your personal APR. A lowered credit score translates to an increased risk in the eyes of lenders and an increase in risk will amount to higher interest and APR rates - this is why it's so crucial to act quickly - before you miss any payments and, before your lowered credit score makes it nearly impossible to access market-leading rates.
Where you can get a Consolidation Loan & How to Compare Offers
At the point where people begin considering consolidation they feel desperate and are usually willing to take up the first offer they receive but, this is a huge mistake that can cost them dearly. When shopping for a consolidation loan, remember that it is just like a regular loan - you should review a number of different lenders and options before settling on the best offer. This includes comparing the APR (not just the interest rate), the repayment terms offered, the penalty fees for non-payment and finding the loan that offers a monthly repayment that you can most comfortably afford (even if this means opting for a longer loan term). Most mainstream banks and credit unions offer debt consolidation loans at reasonable rates but, there are also alternative credit providers that you should consider. This includes providers who specialise specifically in bad debt loans and debt consolidation - as these providers are more likely to offer you a solution that is flexible enough to suit your needs and lifestyle.
In summary, debt consolidation is best for people that have the majority of their debt in the unsecured form, have more than 3 such unsecured debts and are struggling to manage their repayments and are, as a result, missing payments. You must consider mainstream lenders in conjunction with alternative lenders who specialise in consolidation and compare offers to find the most competitive - just as you would when buying a car. In conclusion, can a debt consolidation loan help you get out of bad debt? Absolutely. Can it help everyone get out of debt? Defiantly not - your individual circumstances must be taken into account and you must, at the very least, have three separate unsecured debts for debt consolidation to be of any help. If you're unsure about whether a debt consolidation loan is the right choice for you, you should consult a professional.