One of the many benefits to consider when taking a consolidation loan is that you would just have to payout one monthly repayment to just one lender. This could allow you to be able to keep track of your finances more easily than if you have many creditors. However when considering adding the debts of loans and credit cards together and paying off these debts you would have to be able to restrain from borrowing on credit cards in the future.

To make a consolidation loan work in your favour you would have to take a loan that offered a great rate of interest. If you have store cards and credit cards you have borrowed against then you could be paying a very high rate of interest on them. The interest rates of a consolidation loan are generally cheaper than the rate of interest with credit cards so you save each month. Usually individuals considering taking on a consolidation loan would spread the cost of the loan out so that they pay less each month. By paying out less each month with the consolidation loan than when paying individual creditors this would give you a little extra money to make life that much easer each month which allows you to get back on your feet again.

A consolidation loan could stop you from struggling to meet your repayments each month. If you were to fall behind on repayments for loan or credit cards or are late paying them then you might have to payout extra in bank charges which can soon mount up if you are late with payments on a regular basis. You would also see your credit file being affected by late and missed payments which would make obtaining credit of any kind very hard if not impossible in the future.

• When looking for a debt consolidation loan consider getting advice from a specialist debt management company. Some websites offer advice of consolidation loans and other ways that you could clear your existing debts and get back on the straight again. However, never pay for debt advice – reputable organisation will give you the advice for nothing.
• Be aware that a debt consolidation loan could only be used to consolidate debts which are considered to be non-essential such as loans, store cards and credit cards. You cannot add your mortgage repayments into a consolidation loan.
• Interest rates for consolidation loans are generally cheaper than the interest rate you will be paying when borrowing on a credit card or store card.
• Shop around for the best consolidation loan with the cheapest rates of interest as they will vary considerably with lenders.

Fixed rate interest is exactly as its name suggests – interest fixed throughout the period of the loan.  The advantage of having a fixed rate interest is that it is easy to calculate the exact figure you need to repay.  Your budgeting can then reflect this.  The downside is that there is usually a breakage fee (cost of funds) if you want to repay the loan early.

Floating Rate Interest

Floating rate interest can work in a number of ways. Usually, however, you’ll see this described as being: Base Rate plus basis points.  Although the basis points (which is a percentage figure) are fixed, Base Rate is a floating rate set by the Bank of England from time-to-time; hence the overall interest rate floats.  The upside to a floating rate interest is that there is rarely a breakage fee – if you make early repayment.  The downside is that the rate can swing very quickly against you – as happened in the early 1990s when the Bank of England was raising Base Rate almost weekly.

The best way to try to calculate whether to use fixed rate interest or floating rate interest is to ask the lender to do an Annual Percentage Rate (APR) calculation for you.  APR calculations are adjusters, and so this should help you to determine the real rate of annual interest you’ll need to pay on the loan.

THINGS TO THINK ABOUT

Finally, here are some things to think about if you’re considering a loan:

1. is it absolutely necessary for you to fund the purchase through a loan.  Sometimes dipping into your saving will mean you save in the end;
2. look around for the cheapest (cost) loan;
3. when looking at interest rates, always ask an APR calculation;
4. make sure you fully understand the security issue;
5. don’t agree to any add-ons, like insurance, unless you believe you’ll need them;
6. if you’re going to need to fund the purchase for a period over one year, a loan will nearly always be cheaper than other forms of short-term debt financing – like a credit cards;
7. don’t sign any loan agreement unless you’re completely satisfied you understand what’s being asked of you.  All too often, we are in a hurry to buy the product and don’t read the small print.  Remember, “buy in haste, resent at leisure.”