Debt consolidation loans - why they can be a good idea

Working in the finance industry I see at first hand the reasons why people want to borrow money, particularly if it is not for arranging mortgages for property purchases.

It’s striking to see that debt consolidation is the most frequent reason that people arrange secured loans - in which they use the equity in their homes as security against a larger loan. Around 60 percent of home loans are for debt consolidation reasons.

There are good reasons for taking out a debt consolidation loan - and also strong reasons why they are not a good idea, which I’ll explain in my next post - and this is why so many people rely on them to bring their finances back onto an even keel.

Many types of unsecured debts attract high interest rates and credit cards can top the league in interest rate charges. APR’s of 20% or more is common. Store cards and store based finance can be bad too. Argos, for example, charge a typical APR of 27.9%. This means that each year you are paying almost a third of your purchase cost in interest charges.

So if you are “maxing out” several credit cards and have a store card or store based finance, you are paying huge amounts in interest charges. if the interest charges start to hurt then it’s easy to become overdrawn and your bank starts geting in on the action by charging you all those unauthorised overdraft fees and associated costs.

In this situation, debts mount and life becomes difficult.

As a secured loan allocates the equity in your house as security, home loan lenders can charge less interest as their risk is reduced - although you risk losing your home if you don’t keep up with loan payments. So a secured loan often costs less than all those credit and store cards.

So by borrowing an amount against your house, you can repay all those credit and store cards and stop the bank form charging exorbitant fees as you put money into your bank account to get it in the black again. Your overall monthly loan payments will be less and you can start to turn your finances around.

It is for these reasons that debt consolidation loans offer an attractive proposition and that is why so many people take them out. There are down sides, though which I’ll explore in my next post.