On the face of it loan consolidation can be an ideal solution to sorting out your problems with existing debts.
This solution allows you, after all, to repay all of your current debts and to replace them with one simple loan. If this works, then you’ll have a lower monthly repayment and you’ll pay back less on your borrowing over time.
This option, like any lending product, does not work for everyone and there are times when it should be avoided as a solution because it could actually get you into deeper trouble. Let’s take a look at five warning signs you should look out for before you choose this option:
- A loan consolidation solution is not a good option if it brings with it higher interest rates than those you are currently paying. Your aim here should be to decrease interest, not to increase it. In some cases, lower interest will be a given. For example, most loans here will come with personal loan rates that are far lower than those you will be paying on credit cards. But, if the debts you want to consolidate already have low interest rates or if your credit history means that you can’t get low rates then this might not work for you.
- You should not take out a consolidation product if it means that you will be paying more to service your debt each month than you are currently doing. Again, your aim here should be to have a lower monthly repayment to ease your financial commitments. If a consolidation loan will cost more then you may need to find a different solution.
- You should never look at a loan consolidation option if you cannot comfortably meet its repayments. This will just lead to more problems down the line and you’ll find yourself in a ‘out of the frying pan, into the fire’ scenario. You should always aim to have a cash cushion available every month after you’ve met all your financial obligations. If a consolidation loan wipes this out then avoid it.
- Look hard at how long it will take you to repay your consolidation loan and how much you will repay overall. In many cases (i.e. with significant credit card debts) you’ll find that this can be a quicker and more cost effective route of paying back what you have borrowed. But, although a longer loan term can mean lower monthly repayments, it can also mean a higher overall repayment commitment.
- If you currently have a lot of unsecured debts and are encouraged to take out a secured loan to pay them off then think very hard before accepting this. Whilst it is true that your monthly costs may be much lower you will generally need to put your home up as collateral here. If your existing loans are unsecured then you don’t currently have that risk. Is it worth taking now?
- It is vital to think about the full picture here. These loan solutions can work really well for some people – your aim here is to work out if you’re one of them!