Debt consolidation occurs when someone takes out a loan to pay off two or more other debts. The idea is to amalgamate whatever is owed on credit cards, bank loans or HP. The consumer gets a new loan, which immediately covers all other loans, leaving only the newly acquired loan to finish paying off. Generally, such a move saves the consumer money in monthly repayment fees. Debt consolidation is a very popular form of clearing debt.

Different Types of Debt Consolidation

Unsecured personal loan from a bank or other lender
This type of loan is risk-free, since you do not put up security for the loan, and cannot lose any assets.

Increasing your mortgage from your existing mortgage lender
With this option, you increase your mortgage based on the rising equity of your house. your house is at no more risk than it was before, even though the mortgage was upped.

Secured loan
This option takes you to another lender than your current mortgage provider. It is generally known as a second charge. Because the house is put up as security, the owner can lose it if payments are not made. The institution offering the secured loan will have claim to the property once the original lender has had their liabilities settled.

Advantages of debt consolidation
You may find that consolidating your debt offers you much lower interest rates. Your monthly instalments may also come down significantly. Another advantage is having to deal with only one lender, which is much better than receiving demands and statements from various parties each month.

Disadvantages of debt consolidation
You may incur penalty fees if you settle a loan prematurely with some lenders. You may be charged a broker fee if you take out a debt consolidation loan. You may end up with a longer repayment term, which means that you may have the debt for a longer period. You may run a greater risk with a consolidation deal, since you may have several unsecured debts consolidated with some secured debts. The lender you choose may add PPI (payment protection insurance) on their loans. Be sure you know what the full extent is of your debt consolidation move.

Shop around before you settle on an option
Inform yourself with the different packages available, and make sure you read and understand the fine print. Interest charges (APR), payment protection insurance (PPI) and additional charges may differ greatly from provider to provider.

Don’t borrow more than you need
Don’t borrow extra cash for a new car or home improvements, as this will only worsen your situation.