It's surprisingly easy to get yourself into a situation, where you've relied on money from store and credit cards to the point that you can only afford to make the minimum required payment each month. This is an ideal scenario for credit companies, as only paying the minimum amount will stretch your debt out as far as possible, meaning you've paid the maximum amount of interest.
You may have noticed that many banks and other loan providers offer consolidation loans to pay off such debts, but how can you tell if you're getting a better deal or not?
What is a consolidation loan?
Basically, you'll be taking out one single loan in order to pay off several smaller ones, thus 'consolidating' your debts into one single monthly payment
What are the Benefits?
There are three main reasons, why you may want to consider a consolidation loan:
Reducing Monthly PaymentsUnlike credit cards, the great thing about loans is that they have a definite end date that you can see (assuming you keep up the repayments!), this means that you can look for a loan with a longer payback time (5, 10 years etc) which will help you spread out the payments, making the monthly repayments smaller and more manageable
Paying Less InterestCredit and store cards are notorious for the amount of interest they charge on money lent, with it often being set somewhere around 20-30%. a loan on the other-hand can be acquired with as little as 8% interest; you don't need to be a mathe-magician to be able to calculate that there's a huge disparity between the two figures.
Improving Your Credit RatingWhilst it's true that having credit cards can improve your credit rating, this is only true if you are able to manage them without falling behind with the payments. Taking a loan and thus having just one repayment, reduces the risk of you forgetting to pay and missing the payment date, and greatly increases the chances that eventually you'll be free of this debt. As a result you can expect it to improve your risk factor as a customer and your credit rating will improve.
Also, if you're in particular financial dire straits, you may be interested to learn that some providers offer the chance to defer the date of when the repayments start. This could be anything up to 12 months, which can give you some vital breathing room whilst you get your finances straight – just don't accrue any more debt during this period!
Things to beware
Whilst loan consolidation can be very useful, It's important to not jump in straight away, by assuming that it suits your situation. First off you should collate your existing debts, and calculate how long it will take to clear off, at the rate you're currently paying back. Included in this of course, you'll need to factor in the interest rate to obtain an accurate figure. There are several calculators online which will do this for you for free; once you've input the relevant data.
When you've got an idea of how much it will cost you to clear the debt if you carry on with the current status quo, you can start looking into loans as an alternative. Comparison sites help provide transparency between providers, and you should be able to get an idea of what will be available to you with the payback period and interest owed clearly visible. Thus, allowing you to compare this against your own calculations and make an informed decision based on your circumstance.Image: "© Ocusfocus | Dreamstime.com "