Being in debt can be a scary place and it can be hard knowing what to do about it and which way to turn. One method for helping you to manage your debts is through debt consolidation and here we will explain what it means.
What is Debt Consolidation?
In short, it usually takes the form of a loan which wraps up all your individual debts into one easier to manage package.
Who Would Benefit From Debt Consolidation?
People who have taken out multiple credit cards and store loans, for instance, are often the ones who can benefit the most from debt consolidation. It is all too easy to find yourself with several maxed-out credit cards and problems quickly arise if you only ever pay off the minimum payment every month. High credit interest rates mean that by doing this you never pay off the debt.
How Does Debt Consolidation Work?
It works by rolling all your debts into one payment. There are several ways you can do this:
- Apply for a fixed-rate debt consolidation loan. A secured loan lends you money against an asset such as your home, meaning if you miss repayments your home is at risk. Or you could get an unsecured loan where your assets are not at risk. A secured loan may be an option if your debt is large or you have a poor credit history.
- Another option is to transfer all your existing credit card debts onto a 0% balance transfer card. This is a relatively cheap way of paying off debt but only if you pay it all off before the 0% rate ends, you have a good credit score and you don’t use the new card for further purchases.
- Consider a home equity loan.
Advantages of a Debt Consolidation Loan
Getting a debt consolidation loan is a good idea providing you are sure you can afford to keep up with the new repayments and the attached fees do not cancel out any monthly savings you make. You should also make an effort to use the opportunity to cut your spending and rearrange your finances permanently.
Disadvantages of a Debt Consolidation Loan
As with any financial commitment you need to consider what could happen in the future that may affect whether you can continue to pay off the loan, such as interest rates increasing or you losing your job, particularly if you’ve taken out a secured loan. Consider whether the loan would actually clear all your debts; if not then a loan is probably not the answer for you.
Check internet comparison sites to find the best deal on debt consolidation loans. Take note of the APR (annual interest rate) as well as the headline rate. Read the small print to ensure the fees and charges don’t cancel out any savings.
If your debts are multiple and getting on top of you with seemingly no way out, or if you find you’re using credit cards simply to pay household bills, this is a sign that you need to seek advice from a debt advisor. Citizens Advice offer excellent tips on debt management.