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Debt Consolidation Loans Expalined
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Debt consolidation loans in the UK are personal loans to pay off outstanding debts. Debts come in many forms, when you have multiple debts it can be difficult to keep track of your spending and you may be paying high interest rates. One option would be to get a new loan to pay off all these existing debts. This is known as debt consolidation. It may seem strange getting an additional loan when you are already in debt, but what you are actually doing is getting a replacement loan. In other words, you use this new loan to pay off all your existing debts. The advantages are that managing your debt becomes easier, but more importantly you can reduce the amount of interest that you are paying by getting a loan at a lower APR than your existing debts.
The way you borrow the money to gain a debt consolidation loan comes in two forms, either a secured loan or unsecured loan. Secured loans are secured against your home, so if you default you risk the chance of loosing your home. Unsecured loans do not require your home as insurance, but the end result is the same if you do not keep up repayments.
Secured loans
Since your home exists as collateral it is easier to be approved for a secured loan. Due to the decreased risk for the loan company a secured loan will offer cheaper interest rates. Also because of the greater security for the lender, larger sums can be borrowed and over a longer period.
Unsecured loans
These loans may seem to provide less risk to the person taking out the loan due to the fact their house is not used as insurance. However if payments are defaulted court proceedings will be taken and could result in the loss of a home. Unsecured loans incur higher interest rates than secured loans. Loan companies need to see you are responsible and able to repay your debts. The credit rating is based upon things such as your employment history, existing debts, how long it has taken you to repay debts in the past. Since unsecured loans are more difficult to get, you will need to show a good credit rating to be successful with your application.
If you decide to get a consolidation loan you should be careful with your spending. Your overdraft will be cleared and your credit cards will be empty so you may have a burning desire to go spending again. However, you should resist otherwise you will simply be increasing your debt again, which defeats the object of getting the consolidation loan in the first place.
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YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.
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