Debt Consolidation loan in UK
Being in debt is a big stress in anybody's life. Some debts are rather nasty and the behavior of the lender makes the borrower try to get rid of that debt as fast as possible. In these situations, one considers debt consolidation. There are two ways this can be done.
1.Borrow more money and pay off all loans and then pay one loan repayment that you can afford.
2.Approach some unsecured debt consolidation loaner or credit counseling service to handle this.
All will depend upon which method you qualify for .
1.Borrowing
The first method is to apply for an unsecured debt consolidation loan or a home mortgage loan or if you already have one then a home equity loan. For all these loans your credit record should be good. Only then can you qualify for these loans. Of course, if you do not qualify then, you can go for costlier loans that have a higher rate of interest.
If you qualify for this, then you will pay only one monthly payment that's lower than usual payments as you could opt for a longer loan period. Your interest rate can also be lower in case you have taken a secure loan like a home equity loan.
The other advantage of this will be that you will not be bothered by debt collection people who will go off the moment their pending loan is paid off. This is a big relief.
By doing this your credit ratio will also decrease as you are paying lesser monthly payment and thus after some time your credit rate will also become better. In fact, after some time you can qualify for a cheaper loan and thus save a lot of money.
There are negative possibilities also. What happens if you are not able to pay the monthly installments even now? Since in general it is the home loan that is involved you stand the danger of loosing your house. The other negative thing is, you are not eliminating your loan you are just postponing it . Hence in case you again do the mistake of taking more loans now that you are secure, this can give rise to balloon payments and you could loose your house again. Hence a great care is to be taken before opting for any debt consolidation loan .
2.Debt Consolidation and Credit Counseling Services
If you are not able to manage loans, the next thing would be to approach these other services. There are many pros and cons for these - listed as follows :
These services take upon themselves the payments for the loans and for this they charge a fees from you. The repayments are much lesser than that you are paying. They do not consider your credit records. Hence almost every one can get their help, though they are costlier to pay back. But one of their rules is that the loan should be the insecure loan. Now all your loans may not qualify for this. Plus your credit will be on hold and you will not be allowed to use it. Also, you will qualify for their help only if you have certain minimum amount of loan. Plus your credit score will be adversely effected once it is known that you are taking their help.
But even with all that you will be better off as the payments will now be made by them, the late fee etc. they will get waived off and the debt collection services will be asked to stop bothering you as they will inform them in advance.
The greatest use of using these services is that, they teach money management skills that will help you avoid getting in debt in future.
From the above discussion the role of both the methods of debt consolidation are clear. Now it is for the borrower to decide which one is better for him. He has to very carefully evaluate the debts as compared to his financial position and then take a final decision. It is however clear if you are over your head in debt then one of these will definitely be of help.
Types of loans available
Assuming that the borrower has a reasonably good credit record, let us see what loans he can opt for. One thing special about these debt consolidation loans is you pay off loans with the help and guidance of the lender. These people have expertise in negotiating the loans and save considerable money through their skills.
Mortgage loan
Majority of people go for this loan. It is basically a second mortgage. In this the borrower requests the lender who holds his first mortgage to pay off his loans and add the amount in his earlier loan. The EMI is adjusted accordingly. The advantage is that this is a low interest loan.
Remortgage loan
In this the borrower re-mortgages the house and asks the second lender to pay off the unpaid earlier loan and add the additional amount to calculate the new EMI. This way he gets the advantage, especially if the interest rate prevailing is lesser than the rate at which he originally got the loan .
Credit card
If the loan is less and the loan is to be quickly taken care of then paying off with credit card is convenient. This is so because there is no delay in sanction of loan etc. But the disadvantage in this is a very high rate of interest usually accrued to it. The greatest advantage is that one does not have to pledge his home or the like for the loan. One can carry on paying the minimum Payments till the financial position improves. But the interest rates are so high that one is advised to avoid a debt trap due to the credit card.
Home equity loans
This is the most common loan as with this loan, settlements as well as home improvements can be done. However the unsecured debt consolidation loan repayments have to be made more regularly as the danger of loosing the home exists.
Conclusion
Loan borrowing is like once in a life time decision and much is at stake. It is indeed not a good thing that many people are misguided into taking loans that are not appropriate to their financial situation. This leads to many allied misgivings. A lot of caution is needed to be taken every time a loan is planned.
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