Personal Debt Consolidation Loan

Introduction - a personal debt consolidation loan is a term usually used to describe either an unsecured or personal loan that replaces all existing forms of existing unsecured borrowing such as credit cards, personal loans, overdrafts, store cards, hire purchase and so on.

Unsecured versus Secured Consolidation Loan -for individuals with a relatively good credit history, a consolidation loan can create a lower monthly total debt repayment, where the interest is lower compared to the combined interest charges on other types of personal borrowing. For borrowers who can comfortably afford to make the monthly repayments, it also provides an additional form of borrowing. It provides an opportunity to spend even more money! Television and newspaper adverts offer the opportunity to be make home improvements or 'purchase that dream car you've always wanted' using a consolidation loan. For individuals with a bad credit history, debt consolidation loan is sometimes the last resort. It is often used in situations where borrowings have got out of control and a consolidation process seems the only way out. It is used by individuals to prevent existing debt repayments from spiralling out of control. For borrowers with a bad credit history, it will usually mean that the only option left is to take out securedconsolidation loan against their home. Any mortgage provider or equity release company must be registered with the FSA in order to provide this type of service. If payments are not kept up on a secured loan, the borrowers home is at risk. Consolidation loans rarely solve the underlying cause of the individuals indebtedness, it merely relieves immediate pressure from creditors and puts the underlying problem off to a point in the future. In some cases it may make an individual's overall situation worse.

Re-mortgaging - by extending the size of an existing mortgage, equity can be released in order to repay unsecured debts. During the boom times when house prices were rising before the credit crunch, homeowners felt comfortable releasing equity in the knowledge that if they sell the property, the rise in its value would assist in repayment of the extended mortgage. However, in 2008, it is estimated that 1.8 million people may fall into negative equity as a result of falling property prices. In other words, the value of their homes is worth less than the debt owed on them. In this environment it may be impossible to re-mortgage where as approval rates have plummeted and lenders have lost confidence in borrower's ability to repay huge amounts of debt. "Your home is at risk if you fail to meet repayments" - this phrase is applied to virtually every credit agreement. It literally means that if an individual fails to keep up the loan repayments, their home had been repossessed. It is vital that individuals read their key facts document before signing any form of agreement. This will include the overall cost of the loan and the additional administrative costs.

Credit Card Consolidation - many people across the UK have more than one credit card and are in the habit of switching credit cards to move debt from one company to another. With the onset of the credit crunch, credit card companies recognized at an early point that people's average borrowing across the UK was becoming excessive and highly risky. As a result of the global liquidity crisis, the card companies have now restricted and tightened up on the application criteria for a new card. In some cases, they have even cancelled the cards of existing borrowers, now seen as potential bad debtors. This has restricted at individual's ability to take up a '0% transfer balance' type offer that have been widely advertised by credit card companies in the past. As a result, more and more personal borrowers are now saddled with large unsecured debt from spending on multiple credit cards. This is leading more and more of these types of people to take out a credit card debt consolidation loan to replace their credit card debts. Students are becoming increasingly indebted with credit card debts. Credit card penalty charges and interest for a late repayment can be extremely high. This is one of the seemingly accepted cultural drawbacks of using such a convenient means of credit. These highly charges can be and she replaced with a consolidated loan with an lower overall rate of interest, which naturally appears more reasonable to an individual.

Alternatives - it may appear to a highly indebted individual, that a consolidation approach is the easiest, quickest and least painful option open to them. However, there are other unsecured debt solutions open to individuals that provide similar outcomes. For instance, an informally negotiated debt management plan can provide a lower monthly overall debt repayment and a fixed term. Other more serious and formal procedures include an individual voluntary arrangement and even personal bankruptcy.

Benefits of Personal Debt Consolidation - the main benefits are as follows:-

• Reduced Monthly Payments - by consolidating high interest credit cards, loans etc into one lower average interest payment, the overall monthly overall commitment reduces.

• Reduced Accrued Interest & Penalties - missing debt repayments can cause unwanted late payments penalty charges, increasing the total debt payable. By consolidating, it it possible to restructure debt from interest and hence reduce or eliminate charges.

• Lower Interest Rate - following potential negotiation with creditors by debt management companies, consolidation may provide a lower rate of interest than that of credit cards, overdrafts, store cards, and personal loans. This equates to an overall lower monthly repayment amount, compared to multiple repayments, of varying amounts, rates and terms.

• Simpler Budgeting - individuals benefit from simpler administration and management due to fact there is only one monthly bill, providing a basis for money saving and budgeting. A good debt management company should provide professional counselling advisors to work out a sensible repayment plan for an individual to budget for and commit to.

• Fixed Term - a fixed term loan means that the borrower has a greater degree of understanding, compared to multiple credit agreements with multiple terms and conditions, and multiple types of interest charges applied, including fixed and variable. Conversely, individuals tend to keep credit cards as a lifelong cashflow tool and risk slipping back into seemingly endless periods to clear the card balances.

• Credit Rating - there is no impact on an individual's credit rating by reorganising debts in this way. Whereas more formal options such as personal administration or an IVA, an individuals ability to raise additional finance years into the future, becomes tainted by a bad credit history. As there are less monthly payments to be made, there is less chance of missing a payment through forgetfulness or mismanagement (which would normally impact an individual's credit history report).

• Reduced Hassle from Debt Collection Agencies - the stress created from multiple letters and phone calls threatening bailiffs, court action and quoting other legal process can be reduced by a single point of contact via a debt management company.

Drawbacks of debt consolidation - the main drawbacks are as follows:-

• Risk of Losing Home - for secured loans, failure to make repayments and losing an individual's home! In addition, in situations where a re-mortgage is implemented, interest rates may rise in the future causing increase in monthly repayments.

• Extended Loan Term - The length of the new consolidation loan may extend far beyond existing forms of borrowing. By opting to reduce monthly repayments, the only method may be to extend the loan term far into the future beyond that of the loan terms of the original debts being consolidated.

• Negative Equity - if property prices fall, any secured forms of consolidation loan may increase the possibility that a homeowner forced into negative equity and I not be to afford to sell a property in the future.

• Root Cause of Debt Unchanged - in most cases, the underlying causes of the debts problem do not appear, they are merely put off in future.

• Increased Overall Debt - although the monthly interest charges may be smaller than current forms of borrowing, the overall is of interest may be more, due to the increased length of the loan.

• Limited Usage - in most cases a consolation loan cannot be used to replace other forms of secured borrowing.