What Is Debt Consolidation?

A debt consolidation loan is typically used to pay off your priority debts, for example personal loans, like credit cards, store cards, etc. By combining them into a single and manageable monthly payment, you won;t have to deal with multiple creditors.

How does debt consolidation work?

Your debt will still have to be paid off (it doesn't just disappear), but, you may be able to cut your monthly outgoings as:

The same interest rate will be applied to on all your debt, e.g. credit and store cards' interest rates may as high as 20-30%, but using a debt consolidation loan, this rate may well be much lower.

The debt consolidation loan can be spread over a longer time period. This may reduce your monthly payment, but as the loan's term will be increased, you may have to pay more interest in total. For instance, if your new borrowing consolidates your debts has a lower interest rate this may well reduce your total repayment amount; but, if your consolidation loan has a higher interest rate compared to your original debt or your repayments will be over a longer term, more interest may be paid overall. Another cost consideration is if you decide to settle your loan early or refinance an existing loan, additional costs may be added on to the new loan.

Is consolidating your debt the right option for you?

Whilst taking all your debts and combining them together into one single loan may be an excellent way to manage your money, but there's a few things you should consider:

If you consolidate debt it may not be the best solution for everyone, but if you have stable finances, are in firm control of your spending and can afford the required repayments then this could be just the right option for you.

It's important that you carefully consider all your borrowing options and look for independent and impartial debt consolidation advice if you are not sure what the best course of action are.

If you are already facing financial difficulties (or have a long history of credit problems or money mismanagement) it's not recommended to borrow or to increase your debt levels any more than they already are.

One fixed monthly payment

Instead of juggling multiple payments on credit cards, personal loans and overdrafts which may have different rates and repayment due dates, you can organise your money management into only one affordable, fixed rate payment.

9 Tips You Probably Never Even Knew

1. Never borrow more than you actually need

The whole purpose of a debt consolidation loan is so you can replace all your outstanding bills with one single, fixed, monthly repayment. Start by calculating exactly is owed to all your lenders, then use only this exact loan amount to borrow to repay your debt. It's common sense, but taking out more than you actually need, you will end up increasing your debt, and subsequently take much longer for you to pay it all off.

2. Make sure your payments are affordable

By ensuring you can realistically afford any new loan payments, you can avoid falling into the same debt trap as before.

3. How much savings do you have?

may notIf you have enough savings, you may be better off using it, and not apply for a debt consolidation loan. Check out what the interest rates are on the loan compared to the interest you could earn back from your savings.

4. Manage your money well

Use a budget planner to see precisely where all your money is going, and all the areas where you could make potential savings. For example, do you have gym membership which is unused? Can you save some pennies by cutting back on your nights out? Do you really need to buy that expensive item, or can you do without it? After setting yourself a firm budget, just stick to it.

5. Do you have a bad credit record?

Although having a poor credit history may mean a debt consolidation loan is not right for you, you could still be offered one on less favourable terms. With a poor credit score, there may well be more suitable options for you.

6. Are you a homeowner?

If you're a homeowner and have enough equity in your house, one way of ensuring that you receive the best rates is by considering a secured debt consolidation loan. In fact, to borrow a large sum of money, securing it against your home may well be the only option available to you. It's well worth thinking very carefully about this option, as your home will be at risk if you fail to keep up with your repayments.

7. Reduce temptation

If you do decide to take out a debt consolidation loan, then after you have fully paid off all your existing debt, you need to ensure that you don;t fall back into the same habits which led you into the spiral of debt that you have found yourself in. You can start by cutting up all of your credit and store cards, cancelling all paid credit agreements in writing. Doing this will make sure you're not tempted to use cards to fund an expensive shopping habit, and by borrowing more than you really need, you may end up with a bigger debt than when you first started.

8. Check the rates

To make sure that debt consolidation works out well for you, you need to combine all of your debts into one low APR loan, thereby reducing your total monthly payment. You should make a comparison of different loan providers' advertised rates. This will help you to find out exactly how much your personal loans cost.

Interest rates may change over the loan's term, making it much more difficult to budget for. Make sure that the interest rate being offered over the loan's term is not a variable rate but fixed. This way you can set aside a set portion of your income for repayments without worrying about whether the rates are going up or down.

9. Read the terms carefully

You should carefully read the small print in the terms before you take out a loan, as there could be hidden fees or charges.

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