4 Things To Think About When Considering Debt Consolidation

Debt consolidation can be a useful tool for some people to help them to get out of debt, and regain some financial freedom. Debt consolidation works by you taking out another loan in order to pay the ones that you have currently. The idea is that you end up with one monthly payment to manage instead of several, and in some cases you will end up with a lower rate of interest. 

4 Things to Consider When Considering Debt Consolidation


Like any type of loan, taking out a debt consolidation loan warrants careful consideration.

Secured or unsecured

There are two types of loan, secured and unsecured

Secured loans are taken out with something that you own put up as collateral, like your house or your car. The agreement is that if you default on your loan payments, the lender can repossess whatever item you put up as collateral. This usually means a lower rate of interest because there is less risk to the lender, but it does mean that there is a lot more risk for you in case your circumstances change and you find yourself unable to make loan repayments. 

Unsecured loans are offered without any collateral backing. This usually means that the interest rate charged will be higher than for a secured loan, however, it does mean less risk for you as the borrower. Unsecured loans will be based on your credit score, so the better your credit score the better the rate of interest you will get.

Interest rates

One of the most important things to consider when consolidating your debt, is whether or not you will actually be better off in the long term. Compare the rate of interest on your consolidation loan to the interest rates you are currently paying. If the consolidation loan has a higher rate of interest, then you will end up paying off more in the longer term. 

You should also consider the term of the consolidation loan. If your consolidation loan has a lower interest rate, but is repaid over a longer time period, then the amount of interest you end up paying back could still be more. 

If you want help checking this, OneMain Financial offers a debt consolidation calculator for their personal loans that can help you to decide whether or not it is a good deal. 

Cost of clearing your current debt

Something else to bear in mind is whether there are any costs associated with clearing your current debt. Some lenders will charge you a fee for clearing your debt early, known as an early repayment charge. 

You should factor this into your calculations when you are working out whether or not consolidation is a good deal for you.

Affects your credit score

Debt consolidation loans, like any loan, will have an impact on your credit score. If you are using your consolidation loan to pay off other debts then overall you would expect the impact on your credit score to be positive. 

However, when you first take out the loan, there will be a temporary negative impact on your credit score. You should bear this in mind, particularly if you are hoping to qualify for a mortgage or another type of loan in the future. 

It’s a good idea to get financial guidance on this from a professional if you are unsure.

1 comment

  1. This is such important and useful information! Thank you for sharing!

    ReplyDelete

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