When you are struggling to scale a mountain of debt and the high street banks have all but turned their backs on you, there a generally three options available to you. A instant cash loan may be suggested to you at first, but because of the recent bad media attention you may be dissuaded. If you can obtain a consolidation loan, that may seem like a reasonable option at first, but there are pitfalls. And then there is the IVA (individual voluntary agreement), which can seem like an ideal solution in the short term, but the long-term effects for your credit rating could be devastating.
Firstly, you have the option of the debt consolidation loan. Up front, this looks like a reasonable solution. Take all of your debts, which you will owe to several creditors taken out at different times with differing balances due to each account, wrap them all up in one convenient payment to one creditor.
However, the older your debt, you may find it has a smaller interest rate than the new consolidation loan you are being offered. In real terms, you will be paying back more for those existing balances with lower APRs than the consolidation loan you are taking out. This could be due, in part, to the fact that your interest rate is calculated on our creditworthiness. If you have a proven history of defaulting on payments to your credit card, mortgage or other loan, your new APR will reflect that.
This is a long way around doing it, but call around each one of the companies to whom you owe money and ask them how much is left to pay on the loan – the amount you will end up paying, not the balance – and take that into account when totting up what you will actually have to pay back on your single, new loan. You may well find that you are paying back, in the long term, a lot more than with the individual loans with certain conditions.
And that ‘long-term’ could mean a lot longer than you have left on one, some or all of your existing debts. If you were looking forward to a period when you would be free of one of those debts, you will sacrifice that by lumping that balance in with a new consolidation debt.
It should also go without saying that discipline has to be a strong point for you. Once the other debts are paid off, you will suddenly find overdrafts, store accounts and credit cards available to you again, as you will (should!) have paid off all of those with the consolidation loan (some banks may insist on doing that in their presence, once they issue the funds). Under no circumstances be tempted to lend against those cleared lending facilities – it is more difficult than you think when you are budgeting to pay back the consolidation loan.
short term loans and IVA’s reviewed in the next article – “Conquering debt mountain – plan b”