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What is a Consolidation Loan?

Once the Christmas and New Year period has ended, you’ll probably hear a lot about consolidation or debt management on the radio and television advertising. Why? Simply because the holiday period is the most expensive time of the year, and a time during which many people will rack up debts on loans and, more commonly, on credit and store cards. Where there are people with debts, there is a market for those offering solutions to this, which is why the advertising tends to start around this time of year.

So what exactly is a debt consolidation loan? Put simply, it is a loan much like any other, the only real difference is that it is designed to be used to clear existing debts, and will typically carry a long repayment term to give you low monthly repayment amounts.

In most cases the loan will be secured, meaning the borrower’s house is used as collateral which means the loans can offer the lowest possible rates, although it is possible to get unsecured consolidation loans. The amount that you borrow on such a loan should be equal to the amount of debt that you wish to clear on your other loans and cards, don’t be tempted to add a little extra for yourself – remember that a loan does cost you money, so borrow the minimum that you need.

You may be thinking ‘what is the point? So it clears all of my existing debts, but to do so I’m borrowing that money, meaning I’m left with exactly the same amount of debt I had before hand.’ It’s true that you will still owe the same amount of money – the difference is that you will have only one loan on which to meet the payments, the rate of interest should be lower than those you have replaced, and the loan can be spread over a longer period of time, meaning that you pay less each month.

When arranging a consolidation loan, you should try to keep the repayment term to a minimum, spreading the cost over sufficient time that you can afford the monthly repayments, but not making it so long that you are unnecessarily paying more interest - remember that the longer you have the loan, the more interest you are paying.