Debt is like a quagmire: the more you try to get out of it, the deeper you sink in. Nobody likes to fall in debt on purpose. Some unavoidable circumstances push you over the edge. However, sometimes you slip up evaluating your affordability while taking out a loan or your spending behaviour does not leave the room for emergencies.
Well, whatever throws you in a debt spiral; it is not so easy to get out of it. If you do not settle all of your dues immediately, late payment fees and interest penalties continue to add up, making the size of your debt more substantial and more challenging to pay.
If you have been juggling with multiple debts and it is becoming challenging to keep up with them, you can take out debt consolidation loans. A debt consolidation loan merges all of your debts, including credit card bills into a large one so that you will pay fixed monthly instalments over a specified period.
Debt consolidation loans are considered the best way to get out of debt because you can make a repayment plan, but you cannot decide by considering only one factor. The first thing you need to find out is whether you are eligible to take out such loans or if you get an approval, is it a good idea to sign the agreement?
Here are some of the circumstances when applying for a debt consolidation loan can be a terrifying idea.
Interest rates are not favourable
When you apply for a debt consolidation loan, a lender will go through your financial circumstances and a credit score. Most of the lenders allow such loans to those borrowers who have not made any default previously. However, some direct lenders can sign off on these loans despite your bad credit, but you will have to pay high interest.
Debt consolidation loans for bad credit in the UK is not a good idea at all if interest rates are high. Further, you will have to pay down the debt over a specific period, which means the total cost of the loan will likely be higher.
If you try to put collateral to get the loan at a lower interest rate, there is a possibility that you can lose your valuable asset. Though you get the loan at affordable interest rates, you will likely face difficulty paying your debt because your financial circumstances are turned upside down. You may lose your job, or you catch a medical emergency.
You get a 0% APR balance transfer
Even though you can get a debt consolidation loan at lower interest rates, a credit card with 0% APR on balance transfer will be a much more affordable option. Such cards will allow you to transfer your debt without paying interest until the introductory period expires. By this way, you can settle your debt easily and quickly. However, this facility is generally available for good credit borrowers. However, it has some drawbacks too.
- You may have debt more than your credit card limit or the balance transfer limit provided by your credit card company.
- Your credit card issuer can restrict some types of debt to transfer.
- Some credit card companies may charge a balance transfer fee.
You are overwhelmed by debt despite consolidation
A debt consolidation loan seems to be a silver bullet as they act as long term loans, which means you do not have to pay off the dues in a lump sum. The fact is it will not make payments affordable if you cannot handle monthly repayments.
It is a good idea to use an online calculator to know the total cost of consolidation loans and look out if you can manage to pay it out of your pocket. Do not forget to leave some scope for financial emergencies.
If you find that consolidation loans cannot work for you, seek other alternatives. Talk to debt settlement companies and get counselling from your lender. They may help you with some ways to get out of debt.
Debt consolidation can be a good option as long as you get the loan at affordable interest rates, and you are sure that you will pay off the loan timely.