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Consolidation Loan

Reducing your overall payments on credit products.

A consolidation loan is a special type of loan, invariably secured against your home, to help those seriously in debt to recover. You mop up all your existing debts into one large one; which is then spread usually over a longer period in order to reduce your monthly repayments, thereby helping you get out of debt. In the long run you'll pay more, but at least your salary might be able to cope. A last resort.

The principle of a consolidation loan is simple. You bundle up all your existing debts, which might include credit cards, store cards and other loans into one simple loan. The new loan might be over a longer period, thereby reducing your monthly repayments. As store cards can have draconian interest rates, you might also end up paying a lower interest rate. On the downside, if your old debts have redemption penalties, just closing them down could add to the debt you need to fix.

The issue here is the difference between a consolidation loan and simple financial prudence. If you're sensible, part of your financial management regime should include moving any expensive debts (e.g. the high-cost store cards) down to cheaper debts (a low-cost credit card or loan). That's just good practice.

Your consolidation loan is secured on your house, so you should really only consider this if your debts have reached a stage where good financial management is no longer enough to reduce your payments. You will be bundling up your unsecured debts, but if you don't put your house (literally!) in order, you'll lose your home if you fail to keep up repayments.

A debt consolidation loan is therefore a last resort, and you have to have fairly severe problems to require one in the first place. In around 90% of cases, they do reduce the monthly repayments, but they are not a debt cure-all. At the very least, speak to a professional adviser (your Citizens Advice Bureau is a good place to start) before taking this drastic step.