Debt Consolidation - What it is and how it works
What is Debt Consolidation?
Debt consolidation in the UK is the process where a debtor
takes out a single loan to pay off other existing loans. This
can be done to secure a lower interest rate, and hence make
lower monthly repayments, or to just to simplify your repayment
plans. Unlike debt management, where your previous debts are not
cleared, a debt consolidation loan clears old previous debts,
once and for all.
Debt consolidation takes a number of forms; either as the
conversion of multiple unsecured loans into a new, unsecured
loan, or debts can be consolidated into a secured loan against
an asset, most often a property, which be used as collateral.
Because a secured loan offers less risk to the creditor, the
interest rate can be lower, and hence a consolidated loan can be
cheaper. The risk to you the debtor is that you could lose your
home if you fail to keep up repayments.
For most people in the UK, debt consolidation offers advantages
to people with high levels of credit card debt because at the
present time credit card interest rates in the UK are generally
higher than those offered by the banks. Other groups that would
benefit from debt consolidation are individuals with high levels
of debt against high street store cards, of which there have
been some 14 million issued in the UK, with an average APR of
about 30%. In a recent report by the UK Competition Commission
("Store Card Credit Services", September 2005), it was claimed
that many shoppers were paying inflated interest rates on their
chargecards and being overcharged by