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What Is Debt Consolidation?

A lot of people today have more than one credit card, store card or personal loan. Organising monthly repayments and keeping track of the different interest rates can be confusing. If you want to make budgeting simpler, then a debt consolidation loan might be the answer. Here's a quick guide, provided by www.oceanfinance.co.uk.

What is a debt consolidation loan?

It’s a kind of loan you might be able to use to pay off all your other unsecured debts, replacing them with a single debt.

You might think that debt consolidation loans are for people who are struggling with their loan repayments. However, this type of loan is often taken out by people who just want to reorganise their finances – someone who’s really struggling with their debt payments should think very carefully before taking out any more credit, even if they’re using it to pay off their existing debts.

Plus, someone with a poor credit rating might struggle to find a lender willing to lend to them, and might have to pay a higher interest rate if they do.

Who can consolidate their debts?

In theory, anyone with a decent credit rating might be able to get a consolidation loan.

Homeowners with enough equity might choose to secure the loan against their property, although they need to be aware of the risks involved - securing debt against property means they'd be putting their property at risk if they don't keep up with the payments.

This approach can let them spread their repayments out over a longer period, but again, there's a downside to this - the longer someone takes to repay their loan, the more time it'll have to build up interest, which means it'll cost them more in the long run. However, it can help them keep their monthly payments down to a level they can afford without stretching their finances too far - and that's very important with any kind of borrowing.

What are the benefits of debt consolidation?

Aside from (potentially) lower payments and a lower interest rate, a debt consolidation loan can also bring more clarity to someone's finances. Rather than making multiple monthly payments to multiple lenders, they'll have just one to make every month. The interest rate they're charged on their new loan might vary over time, but it should still make things simpler.

Having said that, it's important to resist the urge to keep on using things like credit cards once they've been paid off. A lot of people choose to keep one for emergencies, but running up fresh debts will mean they'll have to start repaying them as well as their new loan.

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