Over the years I have been asked about consolidation loans and if they are a good form or way to get out of debt. And yes, they can be, however, there a couple of caveats to this way to get out of debt.
You Are Still in Debt
As the saying goes, you cannot borrow your way out of debt, but you can rearrange your debt and finances. And a consolidation loan may help with this.
Address The Elephant in The Room
Before seeking out a consolidation loan to manage your debt/finances, you need to look at what has brought you to this point????
If you consolidate 3 loans or credit cards, into one account, are you going to still use those lines of credit or credit cards? If so, you will fine yourself in more debt, and not going anywhere towards getting out of debt.
Here is an Example of a Consolidation Loan
You owe in total £5,000 in the following ways:
- You owe credit card A £2,500
- You owe credit card B £2,000
- You owe a catalogue £500
So £5,000 in total, and your monthly payments are around £185 or so a month.
You take out a consolidation loan, with a lower interest rate, so borrowing £5,000, and making payments for 24 months, your are now paying anywhere from £180 to a much lower amount if you extend the term, and depending what interest rate you receive.
Obviously extending the term to 36 months will reduce your payments, and while saving only a few Quid a month on the initial example may not seem like a lot, it is giving you a light at the end of the tunnel.
If you only pay the minimum monthly payment on a credit card, it can take many, many years to pay off the balance.
So consolidation loans can work to get you out of debt, you need to weigh the payments and the term and interest rates, and also …….stop debting.