There are multiple aspects to consider before taking out a debt consolidation loan:
An ideal loan will have low account keeping fees, low interest rate fees and low establishment fees. Please bear in mind that the sum of these fees and charges will have an effect upon the total effective interest rate, as well as the length of the loan.
Generally speaking, we recommend that you do not obtain a debt consolidation for a longer period than 5 years (maximum). Should you be unable to afford the repayments on a 5 year term, it is probably best that you consider other options.
Loan repayment fees are predominantly repaid on a monthly basis. You must ensure that you can afford these repayments, as interest is generally calculated on a compound basis and charged monthly to your account. A lender will typically charge default interest if you make any late payments. This often has the effect of significantly increasing the debt consolidation loan balance and can also increase the time period for the loan to be repaid. Some lenders may even call up the loan, meaning the full balance may become due and payable immediately upon default.
It is commonplace for account keeping fees to be charged by financial institutions. Be sure to ask about these prior to taking out adebt consolidation loan, as they do increase the effective rate of interest. In other words the total amount due and payable will be more with high account keeping fees.
Similarly, many financial institutions may charge you a fee when you establish your debt consolidation loan. Be sure to enquire about these also.
A per annum interest figure (for e.g. 11% p.a.) is generally given for a debt consolidation loan. However, the effective rate of interest may be more if you include account keeping fees and loan establishment fees in the total amount repayable. Furthermore, if you are late in making payments, typically lenders will charge a default interest rate until the arrears are paid in full. Default interest can significantly extend the term of the loan. It is important to ask about any default interest rates before taking out a loan.