Debt consolidation explained

Money lenders exist to help people in financial difficulty. With their support, borrowers are able to make vital purchases to help make their lives run a little smoother.

So long as they repay the funds in full, borrowers stand to reap big rewards — namely a credit score boost. Sometimes, however, debts can be tricky to clear.

If the unexpected occurs, or things spiral out of control, a little extra help could be needed to get things back on financial track.

In this situation, many turn to debt consolidation for assistance.

What is debt consolidation?

In essence, this option allows borrowers to merge all their existing debts into one loan.

It’s typically offered to people who are struggling to stay on top of repayments. In taking out a big enough loan, they can move credit cards, personal loans and overdrafts into one place.  

They will still owe the same amount of money, but debt consolidation means that they’re able to reduce how many financial services they owe it to.

With just the one lender, it can be easier to meet repayments.

Are there different types?

In short: yes. There are two kinds of debt consolidation loan: secured and unsecured.

Secured loans are usually fixed against a large asset. Most of the time, this is the borrower’s home or property.

For this reason, it’s critical that repayments are made in full and on time. If not, loan recipients could have their home repossessed.

An unsecured loan is different. As its title suggests, it isn’t secured against borrowers’ assets. Instead, lenders analyse their credit score to determine whether or not to issue a loan to an applicant.

This type of loan doesn’t affect assets. It could impact a client’s credit score, though — especially if repayments can’t be made on time.

Either loan type comes with risks — that’s why good financial management is key for borrowers.

What are the benefits?

Debt consolidation loans can have multiple benefits. A lot of the time, they offer a simple method for debt management and clearance.

This is because this option minimises the number of lenders who are owed money. With this kind of loan, debtors are less likely to lose track of payment schedules — they only need to follow one.

A secured or unsecured loan can be equally beneficial – through effective money management, both options could help sensible borrowers to strengthen their credit score.

For many, debt consolidation loans can offer a straightforward solution. They can even help to enhance money saving skills and budgeting.

Before you make any financial decisions, remember to explore your options carefully. That way, you can make the most of any opportunity.

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