Even now, in the midst of the credit crunch, debt consolidation loans are still a viable option for many. With credit harder to come by, of course, it’s more important than ever to choose the right lender.

After all, credit refusals aren’t just disheartening and time-consuming – they can also affect your credit score. In other words, if you’re thinking of consolidating your debts, it’s well worth taking your time and finding a company that specializes in helping people in your particular situation.

At the same time, be prepared to consider alternatives. A debt consolidation loan isn’t always the best way to deal with your debts, so choose a company that offers a wide range of debt solutions.

For instance, if you’re a homeowner, you might be interested in a debt consolidation mortgage instead. House prices may be falling, but millions of people still have plenty of equity in their property, and a debt consolidation mortgage can be an effective way of using it to pay off high-interest debts, reducing a homeowner’s monthly payments and greatly simplifying their finances.

If you’ve explored your options and decided that a debt consolidation loan is the right way forward for you, you should take a moment to consider the pros and cons in detail.

Debt consolidation loans – the pros

• A debt consolidation loan can reduce your monthly expenditure, since you can arrange to repay it at an affordable rate.
• Consolidating your debts also simplifies your monthly finances. Rather than making multiple payments, you’ll have just one to make – to the company that gave you the consolidation loan.
• It can also protect your credit score, as a single monthly payment is much easier to remember than multiple payments. Making payments late (or not at all) is bad for your credit score, and can be very expensive in terms of charges and raised interest rates.
• Debt consolidation loans normally come with reasonably low interest rates – a particularly welcome feature for people who are consolidating credit card debt and other high-interest debts.
• Finally, consolidating your debt makes it easier to understand. It’s easy to lose track of multiple debts, but when you’re paying off just one loan, you always know exactly how much you have left, and how long it’ll take you to pay it back.

Debt consolidation loans – the cons

• Debt consolidation doesn’t actually wipe out any of your debt. You’ll still owe just as much – it’ll just be more manageable.
• As with any loan, it’s essential to do the math first and make sure you’ll be able to afford it. You may have to arrange to repay your consolidation loan more slowly to bring your monthly payments down.
• Repaying a debt over a longer time period can end up costing more, as you’ll be paying interest on it for longer. (Of course, if the alternative to consolidating your existing debts is missing payments to them, that could end up costing you a lot more through charges and higher interest rates.)
• You may not be able to borrow enough to pay off all your debts. A secured consolidation loan might let you borrow more and come with a lower interest rate, but securing any debt against your property can put your property at risk if you don’t keep up with repayments.
• Debt consolidation also carries its psychological risks. It’s easy to think you’ve solved your debt problems, and some people can’t resist the urge to keep using their credit cards, or even take out further credit. Unless they keep a very careful eye on this, they can end up in trouble again – which is why so many people cut up their cards as soon as they take out a debt consolidation loan.

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This entry was posted on Tuesday, August 19th, 2008 at 3:52 pm and is filed under Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.