From saving money to clearing your debts, we’ve covered three reasons why debt consolidation isn’t just for people worried about debt.
Debt consolidation. Consolidating debt. Whichever way you say it, by default, some people see it as something that’s done by those who have an uncontrollable amount of money to manage.
Although this might be the case for some, the reality is, it couldn’t be further from the truth for many.
If you’re currently comfortably repaying more than one line of credit and hadn’t previously considered debt consolidation, keep tuned, because we’re about to explore three different reasons it might be an option worth looking into.
Debt consolidation definition
In its simplest form, debt consolidation is the process of bundling two or more debts (credit cards, loans, store cards or otherwise) into one, more manageable payment. There are a number of ways you can consolidate debt, but loans and balance transfer credit cards are a couple of the most common types.
Now we know what it is, let’s take a look at why it isn’t necessarily just for people who are worried about debt...
1) It can save you money
Everyone likes saving money, right? Even if you can easily afford all your current repayment plans, consolidating your debts could allow you to clear your debt with some extra change in your pocket.
Credit history If your credit history’s improved since you took out the credit you’re currently repaying, odds are, you’ll have opened yourself up to more competitive interest rates. Quite simply, this means you could switch and pay off your debts with a lower interest rate. Depending on how much you owe and the difference between the interest rates, the savings could easily work their way into the £100s.
0% introductory rates If you’re eligible, you could go one better and consolidate your debts without paying any interest at all - the only snag is that you might have to pay a one-off balance transfer fee, which is normally a percentage of the amount you’re looking to transfer.
Before going ahead, it’s definitely worth doing the maths to make sure the cost of the balance transfer fee outweighs the interest you’d be paying on your current repayment plans.
However, to qualify for the 0% interest-free periods that can come with balance transfer credit cards, you’ll need a good credit history. Because of the heightened risk, lenders don’t normally offer 0% to those with a poor credit history.
Tip: It’s worth bearing in mind that after the 0% period ends, you’ll have to pay interest as you would with any other type of credit card. So, to truly benefit from the lack of interest, it’s best to try and clear your newly consolidated debts before this period expires.
2) It can simplify your finances
We all want an easy life. And if there’s one thing that isn’t easy about owing money to multiple lenders, it’s keeping track of the different repayment dates, different interest rates, and different outstanding balances.
By consolidating two, three or even four debts, you can benefit from one interest rate (which may be zero if you’ve bagged a 0% introductory offer), one payment date, and one balance. What’s not to like?
So even if you’re not worried about the debts you’ve got left to pay, it’s easy to see how streamlining your current debt commitments into one, easy-to-manage monthly sum, is an attractive option for many.
3) It could help clear your debts sooner
Last but certainly not least, debt consolidation could bring that elusive ‘debt-free’ date forward.
How? Well, if by consolidating your debts you’re saving money by paying less or no interest, you’ll have more money remaining to pay off the actual debt you owe, opposed to the fees attached to it. So, you might end up paying more each month – but if you can reduce the interest rates and terms, you could be debt free sooner than you think.
On the other hand, you might have to pay more each month if you haven’t saved much on the interest rates and just consolidated the terms. If you use a debt consolidation loan to decrease your monthly payments, you could end up pushing back your debt-free date – as you’ll be spreading the cost over a longer period of time, meaning you could end up paying more in interest.
Debt consolidation: things to think about
Before you rush into making any decisions, it’s important to weigh up the pros and cons. While we’ve sung its praises so far, debt consolidation can come with drawbacks which certainly shouldn’t be ignored.
As we mentioned above, debt consolidation can push back your debt-free date if you’re making smaller monthly payments over a longer period of time.
You could end up paying back more overall. Why? Because by spreading the cost over a longer time period, you could end up paying more in interest fees.
Before you do anything, ask yourself if the overall interest payments will outweigh your monthly savings – and if they do, is it worth it for you? If you’re unsure, you should look to seek advice on your options and what it could mean for you.
If you’ve taken these points into consideration and you’re still interested in debt consolidation, why not check out our blog dedicated to three different options?
Disclaimer: All information and links are correct at the time of publishing.