Debt Consolidation in UK

Debt Consolidation is a term that is often used when resolving debt problems, but did you know what it is? The details of debt consolidation, the advantage and disadvantage of the whole process are what are detailed in this article. This article will also guide you on the various debt consolidation processes in the United Kingdom and the alternatives to it.

Debt Consolidation - Definition
Debt Consolidation is defined as the process in which one loan is taken to pay off all the other many loans. In short many unsecured high interest rates can be converted into a single form of secured loan on a comparatively low rate of interest. It is also possible to convert many unsecured loan to a single unsecured loan but most probably it involves conversion to a loan involving mortgage of a house or any other property as collateral.

Debt Consolidation - How it works?
Normally when a asset is provided as a collateral for a single loan against all other unsecured loans, the lender gains an assurance on the payment and hence would be willing to reduce the rates of interest due to reduced risk. Thus debt consolidation companies often offer to buy the debts for a discounted manner in return of the asset and this helps the debtor as an alternative of bankruptcy. Normally the payments of multiple credit cards can be consolidated into a single secured loan so as to eliminate the high interest rates that are charged by the credit card companies. A debtor also has the option for shopping around for beneficial rates at which he can go for a debt consolidation. Thus such kind of debt consolidation process is beneficial for both the debtor and the creditor.

Debt Consolidation - Advantages
The reduced rate of interest that it offers can help you save huge on the repayment amount that is being shed out every month. Thus the total interest paid on the single consolidated debt is very much lower than all the other multiple unsecured loans.

If a regular monthly commitment is in your financial plan, then debt consolidation can work wonders. The less interest rate that you can obtain for your single secured loan can reduce your monthly instalment amount thereby reducing your monthly financial burden to an extent. The reduced interest rates also ensure that much of your payment goes towards the total cash rather that the interest and hence helps in faster pay-off.

Also consolidation on a monthly basis will ensure that the number of creditors required to manage is less which means that the single monthly repayment commitment will help tackle your finances in a better way. It is also a very effective way to improve your credit levels based on the regular pay-out methods.

Debt Consolidation – Disadvantages
The number of advantages in debt consolidation is many as discussed but it also contains its fair share of disadvantages. The biggest disadvantage of a debt consolidation is the risk of losing the asset that has been mortgaged as collateral. Hence make sure that you are confident of the repayment options as failure to do so might risk in loss of the asset.

Also when debt consolidation is done for credit cards and other unsecured debts, the debtor loses the ability to write off them in case of bankruptcy. This is also a disadvantage as otherwise these debts can be written off. The lower monthly repayments and the lower interest rates are a boon for low income individuals but this will often make them committed for a longer period of time.

Also sometimes if you fail to secure a single consolidated loan, you might be in a fix of managing multiple secured and unsecured loans increasing your overall overhead. At times your low credit history might not fetch you very good rates and terms for the debt consolidation.

Debt Consolidation – Alternatives
Debt Consolidation is a very advantageous option when you are confident of your repayment pattern and when you possess good credit rating. But other than this there are many other ways which are available in cases of debt problems.

Bankruptcy is a common option that can establish your debt payment inability legally and can write-off loans that are beyond your asset value after the bankruptcy term. But again it is advisable to understand completely how bankruptcy can affect you and your assets before venturing into it. IVA s or other forms of debt management solutions can also be considered to choose the right one for you.

Post a comment