Debt Consolidation – What is Debt Consolidation?
Debt consolidation is a form of debt refinancing that means you take out one loan to pay off many others that you may have, or even consolidating debt owed to your existing creditors and combining them into one affordable monthly payment.
If you owe money to different lenders, a debt consolidation loan could help you take control of your finances and keep track of your money.
For example if you owe three different creditors £15,000, you can take out a single loan to pay those off, meaning you have one affordable monthly payment.
Start Consolidating Debt
The first step in consolidating debt, is to understand whether this refinancing option is the best to suit your circumstances.
Debt consolidation would usually involve taking out new credit to pay off existing debts, whereas debt management is where you negotiate affordable payments with the companies you currently owe money to.
Add up your outstanding debts by checking the balance for each and if any charges apply, get an accurate figure of what you owe, and what you need to repay over the terms of your new loan or management plan.
How to Consolidate Debt
Choose between secured or unsecured debt: If you need to borrow over £25,000 you may need to choose a secured loan, otherwise consider an unsecured option.
A secured loan is one in which the borrowed money is secured against an asset (property or belonging) you own, like your house. Since secured loans are tethered to property of the borrower, they are safer for lenders.
For borrowers, this translates to cheaper interest rates but higher risk. Secured loans are a suitable option when borrowers require large sums of money urgently. Typically, the sum of money sought in a secured loan is greater £10,000 or above but grant options are available for a minimum sum of £3000 too.
Unsecured loans are not backed with any collateral. The process is simple; you borrow money from a lender, based on your creditworthiness and commitment to repay. Since unsecured loans are not tethered to your belongings or property, they are riskier for lenders.
For borrowers, this means higher interest rates and charges. The lenders may also scrutinise your credit score and debt to income information before extending a grant to you.
Decide how long you need or are willing to pay: Try to avoid extending your borrowing for any longer than you need, it will cost more and increasing payment plan lengths can have a negative effect on mental health and your ability to pay back over longer periods.
Look for the lowest interest rate: Rates differ depending on how much you need to borrow and for how long so this step is important.
Pros & Cons of Debt Consolidation
Debt consolidation is specific to your personal needs & circumstances.
Benefits of debt consolidation include –
- Reduction of overall monthly payments
- Cheaper overall debt owed, dependent on your personal circumstance
- Regular and easier monthly payment plans to just one lender
Negatives of debt consolidation include –
- May take longer to pay off completely with lower monthly payment schedules
- You may pay back more over the term of a consolidated loan than the contractual payments to the individual debts due to spreading the total debt over a defined period
Get Debt Solutions from Experts
Money Advisor is committed to providing the best possible service to all those who need help with their finances. If you are struggling to make ends meet or perhaps have experienced a change in circumstances that have affected your ability to manage your finances, please contact us as soon as possible, we will complete a thorough, impartial examination of your individual situation and put you on the road to financial recovery.