If you have multiple loans, debt consolidation can be a way of reducing your monthly repayments as well as reducing the amount of interest you will pay. A debt consolidation loan is a single loan which replaces all your existing unsecured loans and commitments, leaving just one payment to make each month. Whilst borrowing more money to get out of debt does not sound like a logical solution, debt consolidation can actually prove quite economical in the long term.
Check the interest rates on your existing debts and the chances are you are paying out a lot of money just to repay the interest. Meanwhile, only a small amount is going towards reducing the actual debt. One of the most common things people do when trying to reduce their outgoings is to make the minimum repayment each month on credit cards or store cards. The minimum repayment barely covers the interest so the debt will never reduce. A debt consolidation loan helps to break the spiraling interest charges as it replaces all existing loans with a new one, which is usually at a lower rate of interest than the average interest which was being paid previously.
One often overlooked benefit of debt consolidation is the positive effect it can have on your credit rating. When you apply for any form of credit, one of the factors that a lender considers when deciding whether to lend or not is the level of your existing commitments. Debt consolidation settles all your existing loans and debts, which can have a beneficial effect on your credit rating.
For most people, the real benefit of debt consolidation is the reduction in their monthly outgoings. Although this is achieved by spreading the debt over a longer period, it can still work out cheaper to consolidate than to continue to pay multiple loans at the existing rate of interest.