Debt Consolidation

Debt consolidation is a way to pay off all outstanding debts in one go. It requires you to take out one large loan, or remortgage, in order to pay off your all the individual arrangements, leaving you with one larger but more manageable debt. 

Consolidating your debts can lead to lower monthly repayments, improving your cash flow and increasing your monthly income. As well as having less money to pay out each month, you will also only have to make one payment, reducing the likelihood of missing a payment or making a payment late.

In order to reduce your monthly repayments you will need to repay the loan over a longer term, for example £10,000 over 5 years. By paying the debt consolidation loan back slowly you will have less to pay each month, but your overall interest payment for the term will be higher. 

Who can get a debt consolidation loan?

Just about anyone get consolidate their debts with this type of loan, but whether the application is successful with depend on your credit rating. You do not have to own you’re a property in order to consolidate debts because the loan is unsecured rather than being secured against your home.

Advantages

Depending on the type of debts you had originally, a debt consolidation loan may have a much lower rate of interest, which can reduce your monthly repayment. Store cards and credit cards typically have much higher APRs than personal loans, so if you had high outstanding debts on this type of credit, a debt consolidation loan could definitely help cut your outgoings.

The chances are that you have a number of different creditors at the moment, and if you are struggling to keep up with repayments, the stress of dealing with these companies can cause health problems or depression. By consolidating your debt and paying one monthly payment, you will remove the hassle of being chased for payments and only have to make the one payment every month.

Paying off your credit card balance and clearing overdrafts with the debt consolidation loan gives you a fantastic opportunity to cancel these accounts preventing you from getting into debt again in the future.

Disadvantages

Debt consolidation usually ends up costing more in the end as it is a new loan repaid over a longer period of time. It may also not be as flexible as the credit you are used to having, as credit cards and stores cards allow you to pay off as much or as little as you like, provided you meet the minimum payment. 

If you are a shopaholic without a lot of self-discipline debt consolidation might not be the right option for you as using the loan to repay debts means that credit limits are freed up once again. If you do not trust yourself to not start spending again, an alternative option may be more appropriate. By racking up high debts on credit cards etc. and having a debt consolidation loan will leave you in a more difficult position than you were in to start with.