Am I Suitable for a Consolidation Loan?

The thing that you have to consider before taking out a consolidation loan is whether it is going to help your situation in the long term. Many people who find themselves in financial difficulties because of excess credit card spending will take out a consolidation loan wrongly thinking that it provides the answer to all their problems.

Having to make smaller monthly payments at a lower rate of interest suddenly provides them with a greater level of freedom, and they begin to spend on their credit cards again.

If you think that your financial problems have arisen as a result of an excessive lifestyle of spending, then you will have to be strict with yourself if you decide to take out a consolidation loan, cutting up your cards and refusing to use them until you have paid off the loan. Otherwise you will find yourself getting into even more debt as a result.

It is also important to remember that a consolidation loan does not provide a means of writing off any of your debt. The full amount will still have to be paid back in monthly payments, and if you are in serious financial difficulties and are unable to make repayments each month then you should consider a different form of debt management.

The other major factor to consider is that if you take out a consolidation loan as a secured loan against your house, then the situation suddenly becomes more serious. Now you have put up your house as collateral, you put yourself at risk of losing the property if you fail to make your monthly payments. You therefore have to decide whether you want to take the risk of taking out a secured loan, and if so whether you are certain you can keep up with the payments.

When you go to the bank to take out a second mortgage, you will often be asked to provide details of your finances so that the bank can check that you will be able to make the repayments. As such, you will usually only be able to take out a consolidation loan if you are currently employed and have a regular form of income. If you are on benefits or do not have a job, then the likelihood of you being able to get a consolidation loan is reduced considerably.

Essentially, although there are no strict guidelines as to how much debt you are in and to how many creditors you owe money before you are eligible for a consolidation loan, you should only consider one if you are in debt to a number of different creditors and you are a homeowner or have another form of getting a secured loan. In this sense the consolidation loan is often less restrictive than an IVA or a DMP, but it does not wipe out any of your debt and will not have a fixed timetable for repayment.

The golden rule is to only take out a consolidation loan if you can get a lower rate of interest than you are already paying back. If not, then there is no point in starting one as the risk to yourself is increased through having a secured loan.