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Debt consolidation is swapping a number of smaller loans for one large loan with the aim of reducing monthly outgoings.
The aim is to pay less out each month without increasing your overall level of debt.
Cheaper repayments come from switching expensive loans like store cards with cheaper secured personal borrowing or extending the term of the loan.
Who should consider debt consolidation?
Debt consolidation loans are for borrowers feeling the squeeze from higher living costs, but who still have enough money to pay the bills without regularly missing payments.
If you are looking to free up some cash and make your repayments more affordable, then consolidating debt is for you if:
- You have a good credit history without recent missed payments, defaults or court judgments
- You work and have a regular monthly income that covers your repayments
- You own your own home and have equity to cover the refinance or consolidation
It’s unlikely you can consider an unsecured debt consolidation loan if you are a tenant and do not own your home - but other options may be available, so consider talking to a professional debt adviser.
Benefits of consolidating debt
If your finances are under stress, debt consolidation can ease your worries and free up some extra money each month by shaving a few pounds off payments to each creditor.
You can bundle up expensive store cards and personal loans and pay them off while borrowing at a cheaper rate.
Consolidating debts helps with budgeting, as a single payment goes out every month on a regular date, rather than a number of smaller payments that can be hard to track.
Some points to consider
Debt consolidation is a useful and effective money management tool for many - but don’t forget the drawbacks:
- Your home is at risk of repossession if you do not keep up the repayments on secured loans
- Increasing the term without decreasing the loan amount will probably mean you pay more interest over the life of the loan
- You may have to pay an arrangement fee for setting up the loan
- Consolidating debts is a finite solution if you keep borrowing and refinancing, because sooner or later you will run out of equity in your home, which will leave you saddled with expensive debt
Other debt solutions
If you have already taken out a debt consolidation loan but borrowed on your cards again and can’t comfortably meet the repayments, you have probably reached the end of the road of refinancing to keep your head above water.
Other solutions are available - like a financial management plan that works in a similar way to consolidating debts by rescheduling repayments over a longer term.
At this stage, it’s probably best to talk with a professional debt adviser who will take a realistic view of your finances and explain the different solutions and how they will affect you.
It’s a good idea to consider taking independent advice from an expert before taking out a debt consolidation loan, because refinancing may reduce your options.
HJS Recovery helped me sort out my crippling debt problems with both professionalism and kindness. Never judgemental, they agreed a repayment with my creditors that I could afford and now I am completely debt free.
Mr B from Bournemouth
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