Clear
Debts With a Single Payment
Consolidation
of debt or over spending potentially may be
a very effective way to reduce your monthly
total payments where by you have exchanged more
expensive types of lending for example car loans,
credit cards, store cards, personal loans and
overdrafts all to one lender with a far lower
interest rate.
This would normally be done by re mortgaging
and raising capital to pay off all the lenders
in one go. Due to the recent large increase
in house prices more people have equity in their
property which they may wish to free up. Servicing
your debts is simpler and easier to control
all under one lender. This can amount to making
huge monthly saving but caution should be taken
before consolidation as there are some potential
drawbacks that can be associated with consolidating
these types of debts.
Debt
consolidation drawbacks (Equity release capital
rising)
To place all this debt on to a residential mortgage
would mean converting shorter term unsecured
debt into long term secured debt. This would
reduce the equity within the property and weaken
the borrowers position of financial stability
because if the borrow was struggling to service
the debt they could potentially lose their home.
If they struggled to service the unsecured debt
they may not necessarily lose their home be
instead have an arrangement with the creditors
to pay off the debt over time on an agreed fixed
monthly amount.
Caution
should be taken with consolidation as there
may be high existing penalties for redeeming
the loan or debt early. Some people have fallen
into the trap of thinking that they can continually
borrow because of the rising equity in their
property. This is a dangerous habit, a borrower
should never borrow more than they can realistically
afford. Financial discipline and caution should
be taken in order to control finances and obtain
sound money management.
The
borrower may only have a short time to pay off
loans and credit cards but consolidation would
mean greatly extending the term. And the longer
a lender keeps a borrower within a lending term
the more money they will make from interest
payments. However this can be managed if the
borrower makes regular over payments and lump
sum payments to reduce the term of the loan,
they will save money by reducing the total interest
paid. This will buffer to some degree the affect
of extending the term of originally unsecured
debt.
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