Consolidating Debt

What Is Debt Consolidation?

Debt consolidation is the process of taking out one new loan to pay off existing debts to help simplify repayments. By using one loan to pay off your credit cards, store cards, catalogues, loans and other unsecured debts you combine them into one monthly payment.

In this article we discuss how debt consolidation works and why it may be right for you.

How Debt Consolidation Works

In order to consolidate your debts, you need to carefully check how much you owe. Make a list of all of your debts with the up-to-date balances.  Include the repayment amounts as, when you are deciding whether to proceed with taking a consolidation loan, you will need to consider whether your monthly expenditure will be reduced.

If you are approved for the loan, you will use it to pay off your existing debts. You’ll then have one monthly payment instead of multiple payments each month so that should help keep things from getting too overwhelming. The payments are often lower than what you were paying to all the different creditors but may be over a longer period of time.

Avoid High Fees

When considering a consolidation loan, you need to think about the total amount you will have to pay back. You may be able to get a loan at a lower interest rate than your current credit cards however don’t forget to include set up fees in your calculations.

Taking the loan over a longer period of, whilst making the monthly repayments more affordable, may mean you pay back a lot more in the long run.

Make sure before committing to anything that there are no hidden costs and read any fine print so that you know what to expect.

What Are the Benefits of Debt Consolidation?

• You only one payment to make each month
• Your payments should be lower, or at least shouldn’t be any higher
• It is unlikely to have a negative impact on your credit score.

What Are the Disadvantages of a Consolidation Loan?

• You will need to obtain a loan large enough to pay all of your outstanding debts, otherwise consolidating your debts won’t work.
• You will need to ensure that you don’t start using your credit facilities again, which could lead to you ending up in a worse position.
• A lender may require security or a guarantor as a condition of lending you the money.

The cost of a consolidation loan will vary depending on lots of factors including the interest rate, set up or arrangement fees, late fees or early repayment charges.

Can I Consolidate Debt With a Bad Credit Rating?

Every lender has their own set of rules or criteria used to decide whether or not they will grant you a loan. If you have a poor credit rating, there may still be lenders available to you but the interest rates are likely to be higher than they would be if your credit score was better.

What is an unsecured debt consolidation loan?

An unsecured consolidation loan is a personal loan which does not use a home, or high-value item, as collateral.

What Is a Secured Debt Consolidation Loan?

A secured consolidation loan, contrary to the unsecured version, is a loan where the borrower pledges a high-value asset as collateral to secure their debt, such as property. If you do not keep up with the repayments on a secured loan then your home (or what ever asset the loan is secured against) is at risk.

You should think very seriously about using a secured loan to consolidate unsecured debt due to the more severe consequences if you are subsequently unable to pay.

Alternative Ways to Deal With Your Debts

There are a number of other solutions available to tackle your debt. These include Individual Voluntary Arrangements (IVA’s), Debt Management Plans (DMPs), Bankruptcy and Debt Relief Orders (DROs).

Conclusion

To summarise, debt consolidation is a process whereby you amalgamate your various credit cards and other unsecured debts into one monthly payment. In order to make this decision, it’s best to calculate how much you’re paying each month on all of your debts and compare that amount with the consolidated debt repayment figure.

If this new amount is higher than what you’re currently paying, it may not be worth consolidating your debt just for the sake of convenience, even if a single monthly repayments is easier to manage.

The goal of debt consolidation is to reduce the number of monthly repayments and simplify your finances whilst paying less, or at least not more, per month.

If you’d like to discuss your options for debt solutions, then please do not hesitate to contact us here at Care About Money. Our team have over 20 years of experience in the industry and are more than happy to help.