Of all of the debt solutions we offer at debt free life, consolidation loans are one of the most misunderstood; perhaps because they are one of the more uncommon methods of debt relief. While they have their upsides and have helped thousands of people throughout the UK to get in control of their finances, they do have significant drawbacks.
In this blog, we will explore this debt solution a little more closely.
What Is a Consolidation Loan?
A consolidation loan is a style of debt solution which involves taking out a bank loan in order to settle numerous outstanding debts. By doing this, you can make the repayment process significantly more affordable and will be paying one bill rather than several.
However, agreeing to more debt to pay off other debts is very rarely a good idea, and consolidation loans are not always the simple cure they seem to be.
What Are the Positives of a Consolidation Loan?
This type of debt solution does have its upsides, and it can prove to be useful for many people. Here is a brief list of some of the positives to give you an idea of how they can help:
- One Payment: One of the most stressful things about dealing with multiple outstanding debts is having to keep on top of what bills to pay and when. If you make a mistake, you can significantly harm your progress on tackling your balance and avoiding charges. After using a loan to settle your debts, you will be making one straightforward payment to settle the loan.
- Reduced Payments: Every situation is different, but it isn’t unusual for a loan like this to reduce the amount of money you have to pay each month. This can release a little more of your income for day to day life.
- Silence Creditors: Once you have settled your debts with creditors, they will have no reason to be constantly pestering you. Your business is concluded. So long as you make your loan payments as and when you need to, the incessant phone calls and letters should end.
What Are the Drawbacks of a Consolidation Loan?
While it may appear on the surface that this type of solution is too good to be true, it is important to discuss why they might not be as good as they seem:
- Difficult to Obtain: The chances are that if you could benefit from this form of debt solution, your credit rating is already in trouble. This will make it incredibly difficult if not impossible to get a loan, as banks will see it as a very risky lend.
- Debts Paid in Full: Unlike other solutions such as Trust Deeds, IVAs and so on, there is no opportunity to write off any debt. You will be paying for everything you owe in full.
- Extended Repayment Period: Because you will be paying everything you owe back in full, and might be contributing less every month, this can extend the amount of time you are actually in debt, despite making it a bit more manageable.
What Alternative Methods Can I Use?
As you can see, although there is potential with consolidation loans they are only beneficial under quite specific circumstances. However, don’t worry, there are plenty of other solutions that are available to you!
Trust Deeds – If you are based in Scotland and are facing over £5000 in debt to numerous creditors, you may be eligible for a Trust Deed. This will allow you to end creditor harassment, pay a single monthly reduced fee, and write off up to 80% of what you owe.
IVAs – These are very similar to Trust Deeds but for people in England and Wales. While the specifics vary, they function in much the same way by allowing you to stop creditors from contacting you, paying a lesser monthly fee, and write off significant amounts of debt.
Bankruptcy and Sequestration – Again, these solutions are very similar; sequestration is essentially bankruptcy under Scottish law. These concepts are a major financial decision and scare a lot of people, yet they can be a fantastic method of securing a financial fresh start and writing off up to 100% of debt. Unlike Trust Deeds or IVAs, you do not need to be able to offer a monthly contribution to satisfy creditors.
DMPs and DASs – These repayment plans allow you to get back on track just as debt is starting to get on top of you. These do not offer the significant benefits of other solutions, yet you can avoid the need to declare yourself as insolvent.
Do You Need Help with Debt?
If you are finding that debt is taking over your day to day life, then it is time to get help. Debt solutions can be confusing, so it is crucial that you allow us to do the hard work and make sure that you are on the right track to financial freedom.
Whether you need a consolidation loan, a Trust Deed, a DMP, or any other solution, you can be sure that the friendly advice our advisers off will guide you in the right direction.
To speak to one of our team immediately, give us a call now on 0800 808 5124.
Alternatively, fill in our debt calculator, and one of our advisers will call you at a time which suits you!