Take Care When Choosing Debt Consolidation

By: Nicholas Hunt
As credit card and revolving debt rises in the UK, consumers faced with the challenges of managing multiple creditors, high debt, high interest, and the associated emotional burdens are more and more turning to debt consolidation. Debt consolidation is the process of paying of high interest rate debt with a new loan amount that comes with a better annual percentage rate.

Debt consolidation takes a few different forms, but secured homeowner loans are a fast-growing method of debt consolidation. Secured homeowner loans usually offer the best interest rate for most consumers. Because they are secured by the debtors’ personal property, lenders are more drawn to offer the best rates and terms. This is why many consumers are trading in less favorable unsecured credit card debt and high interest debt.

While there are certainly financial advantages available with optimal debt consolidation, there are also challenges and cautions that borrowers need to be aware of. These challenges are often so concerning that some financial advisors and lenders discourage borrowers to avoid large loans for debt consolidation. There are a few common pitfalls of debt consolidation. Two more common concerns include: Reuse of freed up credit funds, and 2) Deceptive lending practices by some lenders.

Despite the interest advantages possible with debt consolidation, many financial advisors caution borrowers to consider their spending behaviors before consolidating debt. Debt consolidation is essentially a “band aid solution” to fix problems that resulted from irresponsible use of debt and bad spending habits. A better loan rate can certainly help create a better position with existing debt but it does nothing to change the bad habits that created it in the first place. Many borrowers consolidate debt, and simply spend more money using the freed up credit cards and other loan funds. Ultimately, they wind up with more debt than they had before.

Another major word of caution from financial advisors warns borrowers to beware of the fine print and details of debt consolidation loans which can be disadvantageous to borrowers. Many lenders are ethical and work with customers, but there are many lenders who take advantage of desperate borrowers. They promote the benefits of debt consolidation but hide restrictive loan details including prepayment penalties, hidden fees, padded loan insurance premiums and more. Borrowers need to read the details of any debt consolidation loan. Of course, a home secured loan used for debt consolidation also exposes the borrower to a risk of property loss. Discretion is very important.

Nicholas writes on debts and ways of dealing with them, including debt consolidation and management programs.