When individuals are mired in debt, they have a number of options available to them. Cutting back, budgeting and bankruptcy are but a few of them. Debt consolidation is another. Consolidating debt has become a pretty common way for people to decrease their debt burden and for several notable reasons. It’s a fairly easy process and it can provide fast, financial relief for the person in debt.
Debt consolidation involves grouping or centralizing ones debt and then getting a loan that will both cover that debt and offer better terms. For instance, a person who has the following debt amounts, $15,000, $1,000 and $12,000 and who is paying 20%, 16% and 9% respectively on those debts, might attempt to get a debt consolidation loan for the total amount of these debts $28,000 at 8% interest. Doing so would lower their payments and save them a considerable amount of money in interest. They would also only have one loan payment. Debt consolidation loans can take a number of forms, home equity loans are one type; others are guarantor loans and provident loans.
There are both opponents and proponents of debt consolidation. Some people champion it and encourage individuals who need it, to use it as a way to speed up the process of getting out of debt. Others oppose it, largely because they don’t believe that it’s a good idea to attempt to get out of debt using debt especially if it requires taking out bad credit loans.
In our opinion, there are many good reasons to consolidate ones debt. When a debt consolidation loan provides individuals with better terms then they are currently receiving, then it would be wise for them to take advantage of it. Better terms mean lower monthly payments and interest. The former helps to relieve much of the stress associated with being in debt, while the latter will allow an individual to get out of debt much faster then they originally would have.
Though debt consolidation requires a person to utilize a loan in order to get out of debt faster, the fact that they already have loans, kind of makes this point moot. At first glance, it would appear that an individual is taking on additional debt when they consolidate, they are in fact securing better terms for the debt that they already have. The debt consolidation loan is used to pay off their current debts. After these have been paid, an individual is left with a single loan for the same amount but with a lower interest rate. When done correctly, the new loan will offer better terms then the previous loans. This does a couple of things. One of the most important things it does is help individuals get out of debt faster then they normally would because of the new loan’s reduced interest rate.
Debt consolidation can be a good way of ensuring you can manage your debt and eventually pay it off but it still has risks. For one you have to make sure you get rid of any existing credit cards once you move everything over to the consolidated loan otherwise there is the risk you will start using your credit card again. I’ve known people to put the credit card away in a drawer “just in case” they need it in an emergency – and, guess what? They started using the card again and now have more debt than before – just cut up those cards or you will never be debt-free
My partner has a consolidated loan because she had debt issues several years ago before I met her and because. of that she has a poor credit rating – but I am now worried that her credit rating will affect me
We are soon to take out a joint mortgage on a new house that we are buying together and already have a joint bank account so presumably our finances are already connected in the eyes of the credit reference agencies. I knew about the debt before but have only just considered that it could also affect by credit score. This means that if I apply for a loan on my own (eg a car loan) the connection with my partner will show up and then this may influence any decision to advance credit to me.
My point is that debt consolidation may be a good solution for the person in debt but the overall financial situation for partners, family husband and wife may be worse – what do you think?
The problem with a partner’s credit rating affecting you – and possibly even the security of your home if you are buying together – if that if she falls into arrrears with any of her creditors then the creditor can apply to a county court for a county court judgement (CCJ). If granted this means any previous unsecured debt (i.e. the debt consolidation loan) with that creditor will change to being secured on the home you jointly own.
If you are sure your partner is managing to pay down her unsecured loan then that should be fine but if she is struggling it may be better to sort it now before you buy a house together. You might want to take advice from a debt charity about the possibilities to secure your new home and avoid the debt becoming secured on the home should she not be able to make repayments in the future – it really depends how big the debt is – could you, for example pay it off for her? That would certainly test the trust in your relationship…