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Personal debt management: Credit consolidation services tips

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One of the key problems for anyone facing personal debt problems is the management of payments to multiple creditors. Those owing money to more than a few creditors may find that the management of repayments presents at multiple times of the month adds to the stress of the problem. As such, one option is to consider the use of debt consolidation services.

What are Credit Consolidation Services

In essence those who offer debt consolidation services effectively buy the personal debt of an individual from the various parties a person has previously borrowed from. the debt is then consolidated into a single consolidation loan which the individual pays back to the provider of the service.

Whilst the exact services offered by a credit consolidation service provider will vary from company to company. Common features of the service are that providers will in the first instance negotiate with creditors, so as to settle any outstanding debts. Secondly the provider will then issue a loan which covers the outstanding debts of an individual, thus resulting in a single outstanding loan to be repaid.

The Advantages and Disadvantages of Debt Consolidation Services

The advantage of a credit consolidation service may be seen as one of a reduction in stress and an increase in convenience for the debtor. Using a debt consolidation service will mean that an individual now has only one point of contact and one periodic payment to make. This can be a significant source of comfort for those who have been used to dealing with multiple creditors and making a plethora of payments at different times of the month.

The downside of credit consolidation services may be seen as those related to the element of cost. In order to make a profit, debt consolidation services will need to issue their loans at a rate which is less than competitive in comparison to prime sources of finance. As such, those using a credit consolidation service may find that they payback more in the long run in comparison to using alternative sources of finance.

In summary, the use of credit consolidation services may be a convenient way to reduce the stress of personal debt by eliminating multiple creditors and gaining a single point of contact. However, the downside is that the use of debt consolidation services is likely to make the total repayments made more expensive in the long run.

Debt Consolidation Loans – Pros and Cons

Consumers take out a debt consolidation loan to consolidate personal debts, such as personal overdrafts, high APR credit card debt and small personal loans. Debt consolidation is performed to simplify family finances, lower household bills and reduce monthly repayments.

The Advantages of Debt Consolidation Loans

  • Simplify household bills. Putting all personal debts under one roof with a debt consolidation loan helps to simplify household bills. A single monthly repayment also means there is less chance of getting bad credit and incurring late payment charges;
  • Reduced monthly payments. A debt consolidation loan makes household bills more affordable as interest payments are lower and monthly repayments are spread over a longer term;
  • Borrow more. A secured debt consolidation loan means that, subject to affordability, consumers can borrow in excess of £100,000. However, unsecured debt consolidation loans normally have an upper-limit of £15,000;
  • Application process. The application process for a debt consolidation loan is quick and easy, particularly for those applying for an unsecured debt consolidation loan. There are also a number of brokers that will help those with a bad credit rating, although they will often a charge a fee;
  • Lower interest rate. A best buy personal loan charges a lower rate of interest than high APR credit card debt and personal loans.

The Disadvantages of Debt Consolidation Loans

  • Unsecured debt vs secured debt. Turning unsecured debts, such as personal loans, credit card debt and personal overdrafts, into secured debt is rarely a smart move. This rules out debt solutions and gives creditors additional powers to collect unpaid personal debts;
  • Existing credit arrangements. Consumers that consolidate debt regularly fail to close down existing credit arrangements after doing so. This can result in the creation of new personal debt and additional money problems as there is a strong temptation to use them again;
  • Bad credit. Consumers that accrued credit card debt and took out personal loans prior to getting bad credit may find that monthly repayments on personal debt become higher. Unsecured debt consolidation loans will attract a very high APR due to the risk of loan default;
  • Longer term. In order to make household bills more affordable, consumers regularly take out debt consolidation loans over an increased term. Whilst choosing to consolidate debt does reduce monthly repayments, it also increases the amount of interest paid on personal debt;
  • Home equity. Consumers with a bad credit rating will only be able to get a secured debt consolidation loan if sufficient home equity is available;
  • Debt solutions. It may be better to tackle money problems and personal debts with a debt solution rather than a debt consolidation loan, particularly for those with a bad credit rating.

Whilst a debt consolidation loan undeniably helps to reduce household bills and minimise monthly repayments, turning unsecured debt into secured debt isn’t a good move. However, an unsecured debt consolidation loan may be available to individuals that have a good credit rating. When choosing to consolidate debt, always remember to close down existing credit arrangements in order to avoid the creation of further personal debt.

Individuals that have signed-up to credit agreements prior to April 2007 should check to see whether an illegal credit card or unenforceable loan agreement is in place. This could lead to personal debt being written-off and the need for a debt consolidation loan negated.

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