How Consolidation Loans Work
You’ve been spending like there is no tomorrow and now all the bills are coming in
from numerous different lenders. The time has come to think about a consolidation loan to help keep down all the monthly payments. Plus a consolidation loan will allow you to manage your finances a little easier, but only if you get rid of all your ‘plastic’.
With so much to choose from on the loan market you’ll have to consider whether you need an unsecured consolidation loan or maybe even a secured consolidation loan. However these are only a few factors you will need to take into consideration before choosing the right consolidation loan.
For example, you’ll need to consider your credit history, how much you can afford to repay each month. Whether you are a Tenant or Homeowner will also make a difference. And you will also come across numerous finance related ‘terms’, which you have to understand before you fully understand what is involved with a consolidation loan.
So, you will need to do your homework before making the right choice when it comes to your consolidation loan and you better swat up now or it could cost you £1,000’s in interest over the duration of the loan.
Where do you start?
Firstly you need to understand the difference between an unsecured and secured consolidation loan.
An unsecured loan is one with no strings attached and which you can normally pay back over a period of up to 10 years. The interest rate offered on this consolidation loan type will depend on your credit rating. Some lenders may not give you an unsecured loan if your rating is too bad whereas some lenders will vary the interest rate depending on your credit rating. Also, with an unsecured consolidation loan you can’t borrow as much as a secured consolidation loan.
A secured loan is secured on your property. And as a result you can lose your property if you don’t keep up with repayments. And as you need a home to secured the consolidation loan against, it is only open to homeowners. The monthly repayments will also be lower as you can borrow over a much longer period. Bear in mind that although you can make your monthly repayments lower with a secured loan means that over the duration of the loan you could be paying £1,000’s extra in interest.
The amount you can borrow on a secured loan can be as much as £100,000 and some lenders will offer more depending on your credit history and salary level.
When you’ve decided on the type of consolidation loan to take out you also need to consider the following.
Credit Level
As mentioned above most lenders will check your credit file whether you are taking out a secured or unsecured consolidation loan. So you need to check your credit file and if you find anything, which may affect your credit rating, then you need to clear this off your file if possible. Otherwise you could end up with a higher interest rate and as a result pay more in interest rates.
How much to borrow?
Don’t get enticed down the road of borrowing more than you really have to. No matter how good the repayments may look you will still end up being out of pocket with a consolidation loan if you are not careful. So, don’t go borrowing an extra £1,000 for an extra treat such as a holiday etc as the additional interest rates will really hurt in the long run.
Comparing Loans
When using an online debt consolidation loans service you need to be careful. By making a full-scale loan application in quick succession it can be written onto your credit file. And it is especially harmful if you have multiple rejections. This will cause a domino effect as potential lenders see that you have already been refused and as a result may then decide to refuse you, and so on and so on.
So the advice is that if you are refused a loan then do not apply again until you find out why. It may well be that it is for something minor but until you get this sorted you should not make a full consolidation loan application again. You may have to go to your bank instead.
Of course when looking for a consolidation loan you will come across the term APR. What is it and how important is it when making a decision on which loan to take.
Loan APR
APR is short for 'Annual Percentage Rate'.
The APR calculation takes into account the basic interest rate, any initial fees, when interest is charged (i.e. daily, weekly, monthly or annually) and any other costs you have to pay.
As all lenders are legally required to calculate APR the same way, it should enable consumers to make meaningful cost comparisons between lending products
When most lenders quote APR you may see it quoted as ‘Typical APR’. Of course ‘Typical’ may not relate to you so make sure you get the exact APR for the loan before making a final decision. Or you can try out an online Loan Calculator where you can input various APR levels to give you a best and worse case APR scenario.
The most appropriate figure to use when deciding whether you are getting a good deal or not is the total cost of the consolidation loan. This will include all interest payments and charges. It will also show you how the total amount that you will repay will change if you work out payments over different periods. Compare the total costs of two loans over identical periods to see which one offers the best deal.
Fees and Penalties
Keep an eye in the small print for any fees or penalties the lender may have tucked away. For example something as simple as getting your loan paid as a bank draft or cheque as opposed to a bank transfer may incur a fee.
And the main one to watch out for is if you want to pay offer your consolidation loan early. The lender may hit you with an early redemption fee, which could run into several £100’s.
The latest scandal to hit the UK finance market is the selling of Payment Protection Insurance or PPI along with a loan. PPI is a form of insurance which covers your loan payments should you not be able to make them e.g. if you become ill, out of work etc.
Although it is a good idea some lenders have been over-charging for these policies, and some will only give you the best consolidation loan rates if you take out their PPI policy.
So, do your homework. If you want the safety net of PPI then make sure and ask the lender whether you can take out a stand-alone PPI policy. If so, then get several quotes to make sure you get the best deal.
And also make sure you read the small print in the PPI policy as a lot of people have been caught out by not getting loan payments paid due to some unforeseen small print in their PPI policy. For example if you are self-employed the conditions on the PPI will be different than if you are fully employed.
Conclusion
This article should have given you a good insight into how to search for a consolidation loan to suit your finances and situation. It cant be mentioned enough that you need to do your homework as there are some very good deals available and you can really save yourself £1,000’s if you pick the right consolidation loan for you.