Debt consolidation – how it works
The concept of a debt consolidation loan is simple; it’s a big loan to pay off several smaller debts. It may seem to be an ideal answer if you’ve got lots of credit card debts for example, but there are pitfalls to consolidating. The biggest is that once you’ve paid off all your credit cards, instead of cutting them up, you might start spending on them again. So then you have your big loan to repay and you’re back to making card payments too.
Another problem is that if you take the consolidation loan out over a long period, it can seem great that your monthly repayments are so low but if you work it out, the chances are you’ll end up paying much more in interest and for a much longer time than if you’d just paid off your cards as you were doing.
However, if you decide you want to consolidate, shop around to get the best rates and terms. Your first visit should be to a credit union or your bank because they are going to be reliable lenders who’ll offer you a fair deal on your loan. That said, there are thousands of reputable lenders so use a loan comparison website to find one that really suits your needs. There are many unscrupulous lenders too, so don’t sign an agreement of any kind before you’ve thoroughly read the fine print.