As more and more people in the UK find themselves immersed in personal debts, the need for a solution arises. More than a million people face severe financial difficulty in the form of debts in the UK due to this COVID-19 pandemic.
Thankfully, there’s a way to effectively manage your personal debts and that is a debt consolidation loan. Debt consolidation loans UK is one of the most effective ways to manage your debts and show financial responsibility.
But what is a debt consolidation loan and what are the factors you need to keep in mind before you apply for one? Let’s find out.
What is a Debt Consolidation Loan?
A debt consolidation loan is when you borrow an amount to pay off all or most of your current debts (mostly credit card loans and other personal debts). Thus after you pay off your existing debts, you’ll be required to pay only the new loan amount, preferably in easy installments and at lower interest rates.
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Debt consolidation loans are again of two types:
Secured Loans: These types of loans are where the amount you borrow is secured against an asset of yours, usually your home. You can lose your home if you miss repayments.
Unsecured Loans: This type of loan amounts are not secured against any asset of yours.
When to Consider a Debt Consolidation Loan
Consolidating all your debts into a single loan amount might seem to be an easy and effective way to manage your debts. However, a debt consolidation loan only makes sense if:
- Your savings remain intact. Fees and charges should not wipe them out.
- You should be confident that you’ll be able to keep up with the payments until the loan is repaid. Think of anything that might happen in the future, for example, what if you fall ill or lose your job, or the interest rates go up.
- When you apply for a debt consolidation loan, you must cut on your spending and take responsibility for your financial situation. In some cases, it is not possible to stop spending on credit cards, for instance, if it’s used to pay household bills. In such cases, you have a problem debt and should reconsider taking out a debt consolidation loan.
- The best consolidation loan plans should be such that you end up paying less interest and less total amount.
When to Avoid Debt Consolidation Loans
Debt consolidation loans don’t make sense if:
- The new loan payment terms are not affordable for you
- The new loan doesn’t clear all your debts
- Sometimes due to the monthly repayment being higher or the period of the agreement is longer. And because of that, you can end up paying more overall.
If You Opt for a Debt Consolidation Loan
If and when you think consolidating your debts will be the right thing to do:
- Research online and utilize the comparison websites to find the best deal.
- Make sure you learn all about the interest rates, not just the headline interest rate. Know the APR (annual percentage rate) or the APRC for secured loans. These will include some extra costs such as arrangement fees. So, learn all about the interests and compare them.
- You should be prepared to cut your credit card spending.
- Finally, get expert advice before you make a final decision.
This is all about debt consolidation loans UK. It’s a rather convenient way to manage different types of debts and as discussed, you should keep in mind some factors before you apply for one.
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