Bad credit loans - the dos and don'ts
With increasing numbers of people looking to take out debt consolidation and bad credit loans, experts have warned many are making basic mistakes with the products.
Research from financial site Fool.co.uk shows three out of five of those taking out debt consolidation loans go on to build up more debt.
Additionally, even though two in three are given the option of paying off their loan early, only one in four manages this.
But this does not mean people should not take out debt consolidation or bad credit loans.
"It can make sense to roll up several expensive debts into one affordable monthly payment if you are faced with a myriad of claims on your money," said David Kuo, head of personal finance at Fool.
"Another option is to snowball your debts. This means paying off debts with the highest rate of interest first, while making minimum payments on other loans."
If you do decide to go for a debt consolidation loan, Mr Kuo recommends caution.
"It is vital to use consolidation loans sensibly, given that those newly paid-off credit cards will be brought back to life with enticing and generous spending limits," he explained.
"It can be difficult to resist whipping them out to reward yourself, especially if you have been diligently paying off your consolidation loan month after month.
"Consolidation loans can be a welcome lifeline for people caught in financial difficulties. But the lifeline can quickly turn into a noose if you submit to the temptation of running up further debts."
Dos and don'ts of debt consolidation loans:
- Do ensure the loan is flexible if you are disciplined so you can make overpayments or pay the loan off early.
- Do make sure that you take out a fixed-rate loan to avoid sudden interest rate rises.
- Do avoid payment protection insurance unless you are absolutely sure you need it.
- Don't borrow more than you need.
- Don't put your home at risk by taking out a secured loan.
- Don't use your credit cards until you have fully paid off your consolidation loan.
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