What is the Role of Debt Consolidation Companies?
There are many forms of lender on the market. Not all of them are banks. Debt consolidations companies play a specific role in the debt market. They often take on higher risk loans, and for this they will sometimes charge slightly higher interest rates on standard personal loans. However, they are far cheaper than the short term loans they usually replace and therefore continue to grow in popularity.
When Should You Consolidate?
As the size of the debt consolidation market continues to expand, the importance of debt consolidators and the business they undertake will grow and grow. Debt consolidation is usually used when people have a very high amount of short term debts. These debts usually come from credit cards, store cards and bank overdrafts. These are highly convenient and flexible forms of credit and are probably the fastest growing area of the market, but they are very expensive and this is the main reason why debt consolidation has come about.
There’s a Tree In My Letterbox!
These days, pretty much every morning in the mail there is another credit card offer waiting to be opened, and every high street store you enter seems to be offering some form of store credit offer attempting to entice you into spending more and more. The amount of outstanding short term credit continues to grow monthly, and currently, the national consumer debt mountain is growing at an alarming rate.
However, people continue to borrow and spend and lenders show no sign of slowing down the rate at which they hand out these forms of credit. In many ways, it is extremely attractive for lenders. This is because of the very high interest rates that they can typically charge. Most credit cards calculate interest monthly, and therefore lenders get a fast and high return on any money they lend. Current interest rates on credit cards can often average in excess of twenty-five to thirty per cent.
What Can Debt Consolidation Do For You?
What debt consolidation offers is a chance to get this borrowing under control and offers a route to clearing the debt in a reasonable time frame. What you do is borrow a fixed, usually secured, loan of enough money to pay back all your various short term credit balances.
For example, if you owe five thousand on various credit cards, another three thousand on store cards, and two thousand on a bank overdraft, this will represent a total balance of ten thousand. If this is being charged at twenty five percent annual percentage rate, then you will have to pay two and half thousand pounds on this year on interest alone. That means that even if you put two hundred a month aside for repaying your debts, then you will not have repaid a single penny on what you owe. All of what you have repaid will have been sucked up by interest. In fact, you will owe even more than when you started as the interest will be higher than two hundred a month.
Advantages of Consolidating Your Debts
So if you found yourself in the above situation, and you only had two hundred a month to spare on credit repayments, you would literally be forced to consolidate the credit as your two hundred each month would not be enough even to hold the debts steady. This is where debt consolidation companies would step in to offer you their services. They will lend you the ten thousand you need to pay back all your other loans, but this will be by way of a fixed loan over a fixed number of years, and charging just seven percent per year. This means that your interest over a year will only be seven hundred, already saving you almost two thousand pounds in interest.
If you continue with the same level of repayment of two hundred a month, you will be reducing your debt by over one and a half thousand pounds. Compare this to the non-consolidated scenario where your debt would actually increase over the same period, with the same repayments, simply because of the high amount of interest you would be paying.
You Will Need Some Security For The Loan
The one thing that you have to consider when consolidating your debts is that the debt consolidation companies will generally be seeking some sort of security for the loan. This will be usually provided either by a personal guarantee from a family member, or securing the loan over your house if you are a home owner. If you are considering securing the loan over your home, you should be very aware of the risks involved with doing so. Secured loans give the lender a direct right to step in and take possession of your home and sell it in satisfaction of the debt. Therefore, consider the risks of securing the loan over your home carefully before committing to any agreements for debt consolidation loans.