The world of debt consolidation can be daunting if you don’t know your options, so we’ve covered five avenues you could take.
There are a number of benefits to consolidating your debts into one, single, streamlined payment. It makes money management much simpler. It takes the stress out of remembering several interest rates. And it removes the confusion of keeping up with multiple dates.
When it comes to debt consolidation, there are several options available – and which one’s most suited to you will depend entirely on your own unique circumstances, like: how much collective debt you have, your credit history, and how much you can afford to repay each month. So, let’s take a look at what options are on the table...
However, to be eligible for the latter, you must own your own home and have enough equity available as this will be used as collateral against the loan – should you fail to repay what you owe.
With either type of debt consolidation loan, you simply take out however much is needed to cover the cost of your debts, pay each of them off, and then stick to the single, monthly payments as per the agreement of your new loan.
Debt consolidation loan pros
Debt consolidation loan cons
Simplify your finances by owing one lender, one sum
The interest may be higher if your credit history has deteriorated since you took out the debts you’re looking to consolidate
By having a single date each month that money comes out, budgeting is made easier
If you take out a secured debt consolidation loan, your home could be at risk
Consolidate multiple types of credit
You need to choose one single term which may extend some debts meaning you will pay more interest in the long run.
Balance transfer card
If you’re only looking to consolidate debt that you’ve racked up on credit cards and/or store cards, then a balance transfer card could well be a viable and cost-effective option for you.
Many balance transfer cards come with a 0% introductory period, meaning you don’t have to pay any interest for a limited period (hence the cost-effectiveness!). However, once this period ends, you’ll have to pay interest as normal – so it’s really important that you check what the interest rate will be after the 0% introductory periodbefore you take out a balance transfer card. You may also have to pay a balance transfer fee. Typically these are around 3% of the balance you transfer.
Balance transfer card pros
Balance transfer card cons
If used wisely, it’s one of the most cost-effective ways to consolidate debt
They can’t be used to consolidate loans or overdrafts
If you don’t have to pay interest, you could get out of debt sooner if you carry on making the same payments.
Money transfer cards work slightly differently. Instead of taking out a new card to pay off existing cards, overdrafts or loans, the money transfer card deposits cash straight into your current account.
As with balance transfer cards, many money transfer cards come with a 0% introductory offer (credit history permitting), making them another cost-effective option to consolidate any debt.
To really make the most of both cards though, in an ideal world, you need to make sure you pay off what you owe before the 0% introductory offer ends – the length of these periods will vary from lender-to-lender.
Money transfer card pros
Money transfer card cons
If you pay your debt off before the introductory offer ends, it’s a cheap way to consolidate debts
You’ll be charged a balance transfer fee of around 3% of the amount you’re transferring
The money you save on interest can help you become debt-free quicker
If your credit history is less-than-perfect, you might not benefit from the interest-free offers
They can be used to consolidate any type of debt
Once the interest-free period ends, you’ll be subject to the lender’s interest rates
Friends or family
If you’ve got loved ones who have enough cash lying around and are financially stable enough to loan some out, they could be another avenue worth exploring.
Odds are, you won’t be asked to pay interest – at all – or pay transfer fees. Therefore, it could be a truly free way to consolidate debt.
If you’re considering this option though, it’s incredibly important that you don’t put anyone else’s finances at risk by doing so, and you’re absolutely confident in your ability to repay your friend or family member in full. Failure to do so could result in bad blood and damaged relationships – something neither of you would want, we’re sure.
If you’ve got a pot of savings you can turn to, this could be another money-saving option worth exploring.
While you’d benefit from not paying interest or transfer charges, bear in mind you wouldn’t be earning interest on the money you take out of your savings account, though.
Another point worth considering is ensuring that you still have enough stashed away for an emergency – like if your boiler or car broke down, for example. If you don’t and the worst should happen, you could find yourself in the position of needing to take out additional credit to cover the cost.
So, there are five possible options you could exploit to consolidate your debts. As with any financial decision, remember to fully research all avenues and weigh up the pros and cons before you reach a final decision.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.