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Debt Consolidation - which is the best route for you?

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Debt Consolidation - which is the best route for you?

If you see bankruptcy approaching on the horizon, now is the time to take action and fight it before it’s too late. Debt consolidation loans could be the alternative that you’re looking for.

Debt consolidation is the process that enables you to align all of your debts under one simplified lending facility. By bringing your various credit facilities together, you are simplifying your finances into a single debt facility. This gives you the advantage of only having to deal with one financial service provider, and also to only have to make one single repayment each month.

One of your objectives when consolidating your debts is to reduce your overall interest costs – your consolidation should enable you to secure a lower interest rate on your total line of credit. This lower rate of interest will enable you to not only meet your regular repayments, but will also save you money over the life of the loan.

Secured versus Unsecured

There are two types of loans to be considered when looking at your options for consolidation loans – secured loans or unsecured loans.

A secured loan is when the financial service provider advances the funds to you on the condition that the loan is secured against something material such as property or a motor vehicle. If you are unable to meet the repayments of the loan, then the lender may be entitled to take possession

An unsecured loan does not offer the lender that type of material security – for example, credit cards are an unsecured line of credit as they are offered on the basis that the lender has assessed that you will be able to make the repayments required. As a consequence, the interest rates related to unsecured lending will generally be higher than that of secured lending.

Consolidating your debt through a secured loan has several advantages – the secured nature of the loan will deliver you lower interest rates, however you need to carefully consider the length of the loan to ensure that you’re not paying more over the life of the loan. It’s also important to ensure that you are able to meet the repayment obligations that you are entering into – otherwise you risk losing possession of your property.

Unsecured lending attracts higher interests rates as there is more risk to the lender, while less risk to you as the borrower. If you have a weak credit score, it may be more difficult for you to consolidate your outstanding loans with an unsecured credit facility.

Debt consolidation considerations

  • Once your debt is consolidated, be sure to close all remaining credit accounts. You don’t want to risk temptation which could take you back to square one.
  • Stick to your new financial framework – if you take out new credit facilities this will undermine the work you’ve done.
  • Budget. Work out your incoming and outgoing expenses – be strict with yourself and don’t spend what you don’t have.
  • Set yourself a personal goal for when you can be debt free. This will be a point to look forward to, and a point where you won’t want to go back.

Be sure to remember that debt consolidation isn’t right for everyone. Ask yourself these five questions before you consider your options.

  • Is my debt load manageable?
  • Can I realistically pay off my unsecured debts within five years or less?
  • Is my total unsecured debt less than half my gross income?
  • Can I get a lower interest rate on my current debt?
  • Am I ready to make a change to my spending habits?

Consolidating your debts could be the first step to rebuilding your financial credibility.

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