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There are a few ways you can put all your debts in one place and simplify the way you repay your debts.
Wondering how debt consolidation works? In essence, you take a single new line of credit (like a loan or a credit card) and use it to pay off all your other debts. You’ll be left with just one payment to make each month – which can simplify your finances. This may sound very appealing and in some cases it can really work as a way to ease debt worries. However, as you’d expect, it has its pros and cons.
How does consolidation work?
There are a few ways you can consolidate your debt. One way is to take out a new loan and use the money to pay off all your other debts. Then you’re just left with the one larger loan to pay off each month.
The idea here is that your payments will be less complicated and easier to keep on top of. You might end up paying less each month as well. This is because you can spread the cost of your repayments over a longer period. But bear in mind that if you pay your debt back more slowly, it will take you longer to pay everything off and you will end up paying more overall.
You might also be able to replace some debts with a high interest rate with debt with lower interest rates – again this can help reduce your monthly repayments.
There are also credit cards that allow you to consolidate other credit card debt – these are often known as balance transfer cards. Some balance transfer cards offer an interest free period – some for up to 32 months – as long as you make at least the minimum payment each month.
You’ll be getting the most out of this method if you are able to clear the whole balance before the interest free period runs out on the card. A money transfer card – which pays money straight into your account – can help you clear other types of debt like loans and overdrafts.
If you’re a home-owner it may be possible to get another loan against your property and use that to consolidate your debts. But the risk here is that you are taking unsecured debts (like credit cards) and converting it into debt that is secured on your home. This means, if you find you can’t keep up with the repayments, your home will be at risk. You have to be 100% sure you can afford the repayments before you get a secured loan.
Possible pitfalls with debt consolidation
If you are already struggling with your repayments, perhaps you’ve missed a few, or paid some late, then your credit history will have been damaged. In this case, you may struggle to get accepted for a new loan to consolidate your debt.
If you do consolidate your debts, it important to close the credit cards and other lines of credit that you pay off. If you run up more debt after you’ve consolidated, you’ll end off in a worse financial situation.
Before you go ahead with any kind of consolidation you need to be sure that you can keep up with your new repayments – misjudging your budget or taking out more credit once you’ve consolidated could put you in an even worse position.
If debt consolidation isn’t right for you…
Debt consolidation isn’t the only way to deal with your debts. There are a range of debt solutions available that allow you to reduce your repayments, suspend your payments and write debt off. To find out which method is right for you, it can help to speak to a trained debt advisor. Use the options at the top of the page to get in touch with someone today.
by Christine WalshBack to blog home