Consolidation Loans

Personal loans   

A personal loan can be useful either to consolidate debt, or to fund a major purchase.  If you are considering a personal loan, do your research carefully, because finance offers can difficult to understand and the wrong choice can be costly.  Consider carefully whether a credit card loan, hire purchase, or a lease arrangement might suit your needs better than a personal loan - especially if the amount required is small.  If you are buying a car, boat, or caravan, you may be able to negotiate a great deal by financing through a lease or hire purchase arrangement.  

If a personal loan is the best option, compare providers and loan types carefully.   

Secured vs Unsecured Personal Loans 

A secured loan requires you to surrender something of value until the loan is repaid.  When you 'secure' a loan from a pawn broker or money lender, you might, for example, leave a valuable item of jewelry with him until you repay the debt.  When a bank loan is secured, you don't actually hand over a valuable item, but you sign documents to give the bank a 'charge' over it.  That means that you can't sell the item without first paying out the loan.  You can't use it as security for another loan.  If you default on the loan, the bank may take possession of the item you used for security to help cover the debt.  If the the item is sold for less than the amount owing, you will lose your property, and may still owe money! 

Banks may accept the item you are purchasing as security, or may take security over another valuable item you already own, such as your family home. 

Typically, secured loans are less costly than unsecured loans.  You are likely to be able to borrow a higher amount on a secured loan, and the application process will be simpler. 

Unsecured loans don't require you to surrender ownership of anything, and if you default you will only lose your credit rating,  though the lender may pursue a court order against you.  Never take an unsecured personal loan that you can't afford to repay or don't intent to repay!  The lender could  seek a 'garnishee' order on your bank account or pay packet, meaning an amount will be deducted regularly and sent to the lender until the debt is paid.  In some circumstances, the lender could seek to have you declared bankrupt.   

Unsecured loans may be taken to finance study, minor home repairs, medical costs, travel expenses, etc.  Usually, they are a last resort, when you have limited cash and no assets.  If you are forced to take a personal loan, plan carefully to repay it as quickly as possible, and then develop a savings plan. 

Personal loans vs Credit Cards 

Credit cards offer outstanding convenience.  They give you instant access to cash when it is needed.  They offer flexible repayment options.  Fees are low.  Personal loan products struggle to compete in the finance market. 

The major problem with credit cards is that they provide 'easy money', and that's a real problem for consumers who struggle to control their spending habits.  You can end up much further in debt that you intended, whereas a personal loan is granted for a fixed amount on fixed terms, with a requirement for regular repayments of principal and interest.  You can borrow just enough to meet your immediate needs, and you have no access to further borrowings unless you go through the application process again to extend the loan.  That makes it much easier for undisciplined spenders to manage debt.   

Personal Loan vs Credit Card Balance Transfers 

Because personal loans offer a fixed amount on fixed terms, they may be a better choice than balance transfers for some consumers to consolidate credit card debts.  If you struggle to manage credit card debt, you might even consider taking a personal loan to pay out all your card debts and cutting up your cards.  That may sound radical, but it could be the easiest solution to mounting debt.  You force yourself to spend only the cash you have on hand, and you are compelled to make a payment every month to reduce your loan.  It might surprise you how quickly you can eliminate your debts, and when your loan is paid out you can start putting the amount you were repaying monthly into savings.   

Travel loans 

Whether to fund an annual vacation at the beach or an overseas trip, travel loans can be an appealing way to fund that dream holiday.  A 'travel' loan is really just a personal loan by another name, but it is specifically intended to fund travel and therefore incorporates some special loan features. 

Again, a credit card may be more useful if you only need a small loan.   If you are travelling abroad, credit cards or special 'passport' cards can make dealing with foreign currencies easy. 

For travelers who struggle to limit their spending, a travel loan for a fixed amount may be easier to manage than a credit card.   

Many lenders offer specific loans for travel, often with extras like discounted travel insurance.  Loans are available from travel agents, but these may have high interest rates and fees and rigid conditions.  Many banks, building societies and credit unions offer holiday and travel loans.  Beware though.  It is doesn't take long to spend several thousand dollars on a holiday, but it can take a long time to repay it. 

The Future of Personal Loans 

Personal loans appeared, a few years ago, to be destined to become extinct. Lenders simply couldn't compete with credit cards. But recently, designers of personal loan products have become more creative, offering redraw facilities and flexible repayment options. By incorporating appealing product features, lenders can ensure that the personal loan product remains a viable option for borrowers.