Is Consolidating Debt the Answer?: Low Interest Debt Consolidation vs Debt Free Solution

The repayments on loans, hire purchase agreements, car finance and credit cards can be overwhelming. Consolidating debt and making a single monthly repayment to a lender can alleviate much of the stress and anxiety associated with unmanageable debt. A debt relief program offers a suitable alternative to putting all debts under one roof. Instead, a payment is sent to an intermediary and they disseminate the proceeds to creditors on a pro rata basis until the debt is cleared.

Methods of Consolidating Debt

There are several ways to consolidate debt. The right option will depend heavily upon the borrower’s credit rating, the amount owed and whether that person is a tenant or homeowner. Loans for consolidating debt can be either secured or unsecured. A secured homeowner loan involves using the property as collateral. An unsecured loan for debt consolidation from a bank or Prosper.com (a peer-to-peer lender) is not backed by an item of value. Consequently, the borrowing term and maximum loan value will be lower.

Greater Affordability with a Loan for Debt Consolidation

A good credit rating enables someone to choose between a secured or unsecured loan for consolidating debts. The borrower can extend the term of the loan, enjoy a lower rate of interest and reduce debt repayments each month. As already alluded to, a secured homeowner loan means that the borrowing term can be a lot longer than its unsecured alternative. Although the monthly commitment will be lower, the cumulative amount of interest will be higher.

Debt Consolidation for Bad Credit

Borrowing money isn’t nearly as easy for adverse credit customers because lenders aren’t prepared to accept the higher risk of default. Not only is the cost of borrowing higher, but it is only an option for homeowners who are able to offer security from the equity in their property. Failure to keep-up with the repayments and the property can be repossessed and sold to recover the lender’s money. This could mean that a debt free solution provides a better alternative to borrowing more money.

 

Low Interest Debt Consolidation vs Best Debt Solution

Consolidating debt isn’t the only suitable way to reduce the percentage of disposable income that goes towards servicing debt each month. A debt relief program will mean a lower credit score, but it doesn’t involve putting the family home at risk. Things may be alright now, but a lot of bad things can happen over time. Should that person lose their job or become ill, making the repayments might no longer be possible. This is a strong argument in favor of an unsecured loan for debt consolidation or a debt solution. Whilst a secured homeowner loan is easier to get approval for, is it worth the risk?