If it seems advertisements for debt consolidation loans are everywhere, it is because consolidated loans are big business. The primary reason for people taking out payday loans or personal loans over the next year will be for debt consolidation.
The promise is a good one--you pay off all your high interest bills, such as credit cards, for a lower monthly payment than you pay now. However, consumers need to be wary, as the payment terms may be for much longer than anticipated, which leads to years of interest payments. Consumers need to ensure they are not being taken for a ride. Another serious issue with debt consolidation is a false sense of security. Once multiple debts are consolidated into one, it can seem as though the debt has been eliminated, which is far from the truth. It is estimated that most people who take out a consolidation loan actually end up in more debt; that paid-off credit card is just too tempting.
Most personal loans are debt programs used to pay off high interest credit cards, with car payments and home improvements following. Nearly one in three loans taken out in the UK in 2005 will be to consolidate existing debt.
When considering a personal loan, consumers need to shop around for the best rates. A low rate could make a significant impact on the amount paid in interest over time--literally thousands of pounds. With the popularity of this type of loan, however, competitive rates are available, and shopping around can be worth the time and energy. Shopping around also helps customers find a loan that best fits their needs.
Debt consolidation loans are not "one size fits all," and as more consumers become aware of this, the better rates and terms they will be able to obtain. Some banks offer personal loans starting at 5.7 percent. Many potential loan customers erroneously believe that they have to be a current client of a bank to secure a personal loan through that institution. This is incorrect, and this belief alone leads to many customers paying too much in interest on their loans.
For example, on a £10,000 loan, consumers could save up to £2,291 in interest payments by using a market leading loan provider as opposed to a high-street bank. As a result, high street banks have approximately half of the market while offering some of the least competitive rates.
Debt consolidation loans are often secured by personal property (such as a home) with variable rates. This means that you run the risk of losing your home with a fixed or variable rate loan if you are unable to make payments. It is wise to calculate monthly payments over the length of the loan and determine if this is the best option for you. If so, careful research into all the options can be very cost effective.