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The most frequently asked questions about consolidation loans

What are consolidation loans used for?

Consolidation loans can be used to pay off all existing debts through one simple repayment plan. People can apply to take a loan or re mortgage their property to pay off their debts.

What are their key benefits?

Unlike other loans, a consolidation plan allows people to raise their disposable income when they lower their monthly instalments. With one loan for all existing debts, it is easier to monitor important deadlines and maintain a decent credit rating.

People can contribute as much money as they wish but they are advised to make repayments as quickly as possible to avoid higher interest rates in the long-term.

Who can apply for them?

Individuals do not need to be homeowners in order to take out a consolidation loan. However, it must be stressed that since these loan agreements are unsecured, they will be accompanied by higher interest rates upon repayment.

What are the main disadvantages of consolidation loans?

The main disadvantage of a consolidation loan is that customers will usually end up paying more in the long-term than for other loans. People who experience difficulties in keeping up with monthly payments may end up in even more debt, incurring heavy overdraft charges, credit card fees and more interest payments.

People with poor credit ratings may have problems in being accepted for consolidation loans or they may have to pay higher interest rate than individuals with stronger credit scores.

Other important advice

Homeowners should be very careful when arranging to sell of debts against their property. In the worst case scenario, a person's property could be repossessed if do not keep up with their scheduled monthly repayments.

It is always a good idea to seek advice from an independent financial advisor before considering any type of loan contract.

Some of the best websites for online financial advice include direct.gov.uk and comparethemarket.com.

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