When to Apply For a Loan For Debt Consolidation

The basic concept of a loan for debt consolidation is to take out one loan in order to pay off several other debts. This way you can secure a lower interest rate, especially if you can find a fixed interest rate, or for the convenience of servicing only one loan. A loan for debt consolidation will often involve a secured loan against an asset that serves as collateral, most commonly the equity that you've built up in your home.

Using the equity as collateral allows a lower interest rate because by collateralizing, the homeowner agrees to allow foreclosure of the home in order to pay back the loan if the borrower defaults. Since the risk to the lender is reduced, the interest rate offered is lower and the loan costs less to repay.

Threat of Bankruptcy

When the debtor is in danger of bankruptcy, a debt consolidator can sometimes offer a loan for debt consolidation at a discount. Such discounts mean you can pay your debt back easier and avoid bankruptcy, but should only be taken if you're sure you can pay it off. Debt consolidation can affect the ability of the debtor to discharge debts in bankruptcy, meaning that if you can't pay it off then you may not be able to declare a legal bankruptcy later to take care of your debts.

Credit Card Debt

A loan for debt consolidation is often advisable for individuals who are struggling to pay off credit card debts. Credit card debt can carry a much higher interest rate than even an unsecured loan from a bank, so consumers with large amounts of debt who own property such as a home or car may get a lower rate through a consolidation loan using their property as collateral. Then the total interest and the total cash payments towards the debt is lower, allowing the debt to be paid off sooner and incurring less interest.

Deciding Whether or Not to Consolidate

Applying for a loan for debt consolidation can help relieve a crushing debt load, but consolidating your debts isn't something to rush into blindly. You should carefully consider all of your options, making sure that you're not going to create additional debt problems by borrowing more money. If you're sure that you'll be able to manage the additional debt, then it's likely a good idea for you to consolidate.

On the other hand, if it appears that you're going to have problems with repayment or are likely to run up additional credit card debt once the old charges have been paid in the consolidation then you might want to look for other alternatives so as not to create further problems down the road.

Paul Parker writes finance and loan articles for the UK Loans Only website at www.ukloansonly.co.uk [http://www.ukloansonly.co.uk/]

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