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Debt consolidation: everything you need to know
Juggling numerous debts at once can be very stressful, especially if you can’t keep track of who’s owed what. When this confusion causes you to miss making repayments on time, your debt problems may be at risk of escalating. A possible solution to help you manage your various debts is debt consolidation.
What is debt consolidation?
Debt consolidation is a way of merging all your debts into one. This means that instead of making lots of separate payments to different lenders, you’ll make just one payment a month to your new lender. All of the money you owe will still be paid off, just in smaller chunks and over a longer period of time, which may mean you end up paying more interest than you would have originally. However, you should find keeping on top of your debt more manageable.
What are my options?
You could apply for a 0% balance transfer card and move the debts you have on your current credit and store cards on to this. Bear in mind that you’ll probably be charged a balance transfer fee for doing this. However, shifting your multiple balances means that you no longer have to worry about making lots of different repayments each month, and you can instead just pay off your balance transfer card. Make sure you pay off all of the balance – or as much as you can – before the 0% window ends and you’ll avoid being charged interest.
A more traditional form of debt consolidation involves taking out a loan. You use the funds this provides you with to pay off your other unsecured debts, like your credit and store cards, and then simply pay off the loan month-by-month. You could choose either an unsecured personal loan or a secured loan – although be aware that as the latter will be secured on your property, if you default on your repayments there’s a risk your home could be repossessed.
The advantages of a debt consolidation loan
By spreading out your debt repayments over a longer period, you should be able to reduce what you pay back each month from what you were previously spending on all your unsecured debts combined. Interest rates can also often be lower when paying back a debt consolidation loan, particularly if it is secured.
Providing you keep on top of your repayments and don’t fall behind, a debt consolidation loan may be better for your credit score than another form of debt solution. As long as you try to consolidate your separate unsecured debts before you fall behind with repayments and make sure you keep up with your new loan repayments, lenders should see from your credit report that you’re a responsible borrower. With a different debt solution, such as a debt management plan, you are breaking the agreement you originally made with your lenders and paying back less each month, which could damage your credit score.
Perhaps the main benefit of a debt consolidation loan is that many people find making just one payment a month easier to stay on top of than making several to different lenders. This may reduce the risk of you missing a repayment simply because you’ve lost track of who you owe money to.
Where to take care
As a debt consolidation loan lengthens the period you are in debt for from what you originally agreed, you need to make sure that it is the best option for you before you embark on this way of managing your debt. Bear in mind that by lengthening the term that you make your repayments for, you could pay more interest. Ultimately, if you think you can cut some of your expenses elsewhere to free up cash to go towards clearing your original debts, this may be a more suitable option as it could mean you get out of debt faster.
If you do decide to take out a consolidation loan to clear your credit and store card balances, you might be tempted to start spending on these again. However, you’ll then have to repay these debts and your new loan, which could make juggling your finances even harder than it was before. To avoid the temptation to start spending again, make sure you cut up your credit cards and cancel any overdrafts that you have. If you don’t, you could potentially lead yourself into further debt.
Keep in mind that while the majority of debt consolidation loans are unsecured, there are some that require you to secure the debt against your home. Think carefully before you secure any previously unsecured debts against your home as if you then fall behind with your repayments in the future your home may be at risk of repossession. Find out more about debt consolidation here.