Debt consolidation is basically where someone takes all of their outstanding debts and combine them into one, single and more manageable loan so it is easier for the person to deal with. This can be through further unsecured borrowing, like a personal loan, or a secured way of borrowing against an asset, such as a house or a car.
The process of taking out debt consolidation can assure a lower overall interest rate to the entire debt load you have built up and offer the overall convenience of paying off what seems like only one loan.
Things to consider
Consolidating all of your existing debts and credits commitments into a single monthly repayment may sound extremely attractive. It can be a hugely positive thing, particularly if you have a number of creditors to deal with. However, please be aware of a few things:
- Like with any loan, it is essential to make sure that you can actually afford any repayments when they are due. Carefully draw up estimations of whether the proposed arrangement of one single repayment will enable you to comfortably meet your essential living costs, like as food, clothing and travel. This is also the case for your priority expenditure such as your rent, bills, mortgage and council tax every month. A poor credit history more usually than not means poorer credit terms and a higher repayment.
- When you are committing to taking out another loan, you are technically paying back an even larger amount over a longer period of time. Please be sure that you that you understand when you’re the repayments finish and that you are content with the length of the new loan, in short, how long you have to pay it off.
- A debt consolidation company will usually look at using a secured loan against your larger loans associated with an asset such as your property. The interest you may be paying on an unsecured loan will be a lot higher in most cases. Having a secured loan means that it will be at risk if you do not keep up with repayments as it is against things like your home or car.
- Please consider if there are any other alternatives to essentially increasing your levels of debt that are right for you. There are alternatives for you to explore and consider, rather than taking out another loan, that will actually reduce your debt, freeze interest and any charges, and prevent your creditors taking any enforcement action against you legally. Consider looking at Debt Relief as an option.
- If you do decide to take out debt consolidation, do not fall into a trap of staring to build up new debts once again while you are paying off the old.
What are the benefits of debt consolidation?
The key to making debt consolidation work is to be careful about managing your spending.
Debt consolidation, when used correctly, can aid you by:
Reducing your monthly repayments
By taking out debt consolidation, you are spreading out the term of the debt. Through this, you may be able to reduce your monthly repayments to a much more manageable level. In most cases, people are paying what is known as the ‘minimum payment’, which is allowed on existing debt. What this usually means is covering the interest rate of the loan, meanwhile leaving the total amount that is actually owed unchanged.
Reducing the interest paid
If your debts are on a credit card that have a high interest rate, that means you will normally pay back less interest on your debt with a loan.
Improving your credit rating
If you become able to pay off the loan and the accumulate no further debt, this will be seen positively by your bank and in turn have a positive impact on your credit rating. As a side note, it is a good idea to check the reports that display your credit on before taking out any loans, including debt consolidation.
How can I get a debt consolidation loan?
A loan lender will assess how much outstanding debt you have and also your credit risk to see if you are eligible for a debt consolidation loan.
If you have a history of bad credit or any previous large debts, a lender may only consider offering you a secured loan, so things are indebted against your assets and you are therefore more likely to pay and reducing the lenders risks. Therefore, if you have a previous history of bad credit and large debts, make sure you can cope with the loan repayment or your house may be at risk.
Nowadays, many personal loans can be used to consolidate your debts. The lender will look, like any other type of borrowing:
- Your credit history
- The overall amount you want to borrow from them
- The length of time you will need to repay the debt
You are at an advantage if the outstanding debt you have is low, and you have no problems with your credit ratings. A personal loan is easier to get for a better deal, and you could actually reduce your debt through this method.
Can I use Guarantor Loans as a form of Debt Consolidation?
Yes, you can use a guarantor loan as a way to repay your other debts, however, it must be used responsibly. Using one form of credit to pay another is never a sustainable way to overcome an underlying debt problem. One should not have to rely on the good credit score of their family member, friend or spouse in order to get credit and repay their debt. Again, you must be aware that this is another form of finance that you will need to budget for and repay and you must be conscious that you are also including another person who is close to you in the transaction.
Budgeting more effectively is likely to be a better way of getting out of debt. This includes watching closely what you spend on food, entertainment and travel every day in order to save money and put towards your outstanding bill.
You can also consider selling things that you don’t need online or via a car boot sale as a way to raise some finance to pay off your bills. There is always the option of professional advice help through charities like Stepchange and Citizens Advice Bureau to help you.