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Do not use other loans for consolidating debt

Feb 3, 2015 |

Now and again we come across someone who is trying very hard to maintain their debt repayments, but is failing. They apply for a personal loan to help with unpaid debts but of-course loan application is declined. Then they simply move down  the line to short term cash lenders.  While cash lenders may be prepared to offer finance where no other lender is, these loans should never be considered for the purposes of debt consolidation.

Cash loans are expensive

Debt consolidation is about finding a cheaper form of finance than you currently have and consolidating several debts into this one facility. Quite often borrowers opt for using a mortgage or a well priced personal loan for the purpose of consolidating several more expensive debts. The idea behind debt consolidation is that first of all you can afford the repayments, and secondly the consolidated solution is cheaper than the finance arrangements held in place previously.

Cash loans are however rather expensive. The cheapest will cost 25% p.a. but majority are up around the 49% p.a. Any debts you may be looking to consolidate are unlikely to be any more expensive than the cost of a short term cash loan.

Short term solution only

The other problem with using short term loans is just that – they are only offered for a few weeks or several months but the debts which they are used to consolidate may take a number of years to repay.

Must have an exit position

What are you going to do when the new loan you have taken comes up for repayment? Anyone who accepts a loan today without a clear picture of how they are looking to repay that loan, are only setting themselves up for an even bigger debt problem.

Do not confuse a new loan with debt consolidation

A popular perception from borrowers is that while they have several thousand worth of unpaid bills, they are hoping to find a lender that will overlook the fact that they currently owe money which they cannot afford to repay, and will agree to give them a new, unsecured, cheap loan to absorb these debts.

These may be medical costs, legal costs, money that you still owe to a lender as a result of an asset repossession, school fees etc.  If you have not been able to pay these bills you really need a new personal loan to help you meet all payments.

The reality of the finance industry is that loans are priced by risk.  A borrower who has had some financial difficulties with past repayments, is not going to qualify for an unsecured personal loan to consolidate unpaid debts. If you do find a lender to consider your loan application the cost of such loan will be very high and can place you in a worse financial position than you were in prior to taking such a loan.

Best to negotiate with current creditors

Instead of looking for a new loan, try and make informal payment arrangements with current creditors. In majority of cases this strategy proves to be cheaper in the long run.

Posted in: debt help, debt relief

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