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Debt consolidation - what are my options?

author: Holly

By Holly

If you’re making a few different credit card and loan repayments each month, you may have thought about merging them into one payment.

This is known as debt consolidation, but it can be a little overwhelming, especially if you’re unsure what options are available. In this blog, we’ll talk you through the different ways you can consolidate your debts.  But first, let’s take a look at the advantages of consolidating.  

Is it the right solution for you?

Consolidating your debts can help you to budget and it may even save you money. If you consolidate your debts using a loan or credit card with a 0% interest period, you will not be charged interest on your repayments during this window (more of this a little later).

But before merging all your outstanding balances together, you should weigh up your options. Bear in mind that debt consolidation may still cost you more in the long run than your original agreements - especially if you spread the repayments over a longer term.  

How do I consolidate?

If you’re considering debt consolidation, you have a number of options. It all depends on your financial situation and your own preference.

Let’s take a look at the different options.

Debt consolidation loan

With a debt consolidation loan, you take a loan out to pay off the outstanding balances on your other loans, overdraft, credit cards and store cards. You’ll then pay this back by making one payment a month. You can choose between an unsecured personal loan and a secured homeowner loan.

A homeowner loan lets you borrow more than a personal loan and then pay it back over a longer time. It’s secured against your property, so if you miss any payments your home will be at risk of repossession.  

Meanwhile, a personal loan is designed to lend you a smaller sum for a shorter period, and the interest is usually higher – but your home isn’t at risk.

Balance transfer card 

A balance transfer card with a 0% interest offer means your repayments all go towards clearing your balance – not towards interest. However, once the deal ends, you will be charged interest – probably your lender’s own rate.

So how does it work? If you have outstanding money left to pay on your credit or store cards, you can transfer the balance over so you’re only making one payment per month. You can’t use this type of card to clear debts on loans or overdraft.

It’s worth keeping in mind that the interest free period is typically offered when you have a good credit history. If you’ve missed payments or defaulted in the past, you may find that you don’t get this offer.

And while a balance transfer card may charge zero per cent interest, you’ll probably have to pay a fee to make the transfer in the first place. Check this doesn’t outweigh what you’ll save on interest.

Money transfer card

With a money transfer card, you transfer money into your current account rather than transferring the balances of your existing cards over to a new card. You can then use this money to pay off your debts.

As well as paying off the balances on your credit and store cards, you can clear any outstanding debts on your loans, overdrafts and catalogue accounts using a money transfer card. As with a balance transfer card, you may be offered a 0% interest period if your credit history is in the best shape.  

Before you do anything…

Consider why it is you want to consolidate your debts. If you want to make one manageable monthly payment a month instead of several, it could be a good option for you.

But if you have started to struggle to stay on top of all your different credit agreements, or – worse – have missed some of your repayments, debt consolidation is probably not your best choice. Missing payments acts as a warning to new lenders, who may not accept your application to take out a new debt consolidation loan or card.

Instead, you could consider speaking to a financial advisor about how best to get your finances back on track.  

Disclaimer: All information and links are correct at the time of publishing.

author: Holly

By Holly

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