Friday, 23 September 2016
average person has around £3,638 of debt in the form of credit loans. Are you in more debt than this (not counting your mortgage)? And are you struggling to keep on top of who you owe money to, how much you have left to pay, and how long it’s going to take you to clear? Well, if you answered yes to any (or perhaps all) of these questions, debt consolidation could be for you.
Debt consolidation is where you merge your debts together into one loan. The way it works is that you apply for a debt consolidation loan so that you can pay everyone you owe straight away. Then, all you have to do is pay back one loan to one lender, making monthly payments at an affordable level.
This has lots of benefits, and could be the right choice for you if any of these things sound more attractive than staying in the situation you’re currently in:
• You’ll only have to pay back one ‘person’, not lots of different lenders.
• You’ll be able to keep on track of what you owe, and only have to focus your attention on one debt, rather than multiple debts.
• You may be able to pay less interest than you were paying before.
• The overall amount of money you owe won’t increase if you borrow exactly what you currently owe.
Does this sound good? Well, then it may be the right option for you. But don’t move too fast – you need to do some research to see what type of debt consolidation loan is right for you. There are two types of debt consolidation loans:
• The first is a secured loan, where you borrow the money against an asset that you own. This is usually your house, but it could be a car, if your car has a high enough value, for example. If you don’t keep up with your repayments, the lender has the right to take the asset you’ve secured the loan against and sell it to recover the money you owe them.
• The second option is an unsecured loan, where the money isn’t borrowed against anything you own. The upshot of this is that the lender doesn’t have a claim on any of the assets you owe if you miss a repayment, but the interest rate tends to be a lot higher for this reason! If you do miss repayments, this will badly affect your credit score.
If you’re thinking of taking out a debt consolidation loan, you need to make sure it’s the right choice for you.
Here are some things that indicate it might be a good financial decision for you:
• You’ll be clearing your existing debts with the loan, as long as you don’t get into more debt while you’re repaying. If all goes well, nothing is left hanging around, and you’re only dealing with one debt.
• The new loan will make your monthly repayments smaller than the amount you’re currently paying across multiple debts.
• You should be able to afford the new loan repayments.
Just be sure to get some good advice before you make a decision, and don’t forget to read the small print and extra fees and charges too. Most importantly of all, think very carefully about taking out a debt consolidation loan if the loan lasts for such a long time that you’ll end up paying back more money overall… even if the monthly interest is lower!
Jessica Foreman is a Durham University graduate specialising in business and lifestyle based writing. She has developed her skills on projects surrounding The British Broadcasting Company, and running a print and online based magazine whilst at university. She is currently looking towards starting her Masters in Mobile and Personal Communications as well as broadening her horizons through travelling.