How can I get out of debt?
Find out which debt solution is right for youGet started
Answer a few simple questions
See if you are suitable
Understand your next steps
Debt consolidation is a way of organising your debts so you only have to make one payment.
Debt consolidation is simply a way of organising what you owe so you only have to make one payment each month. If your debts are getting on top of you, some sort of debt consolidation might be the way to solve the problem. In today’s blog, we’re going to look into the area of debt consolidation and what it means to people who are struggling with their debts.
Debt consolidation loan
One way of consolidating your debts that you may have heard of is to get a loan. The idea of taking out more credit to pay off existing debts may seem strange, but it can make sense in some cases.
If you have a lot of debts that are hard to keep track of, but you think you could manage your repayments if they were simplified, a loan might be right for you. The rate of interest you have to pay may reduce as well, and you won’t have all the debts with their individual interest rates to contend with – it’ll just be the one loan.
You might be able to pay a debt consolidation loan back over a longer period of time than it would have taken you to pay off all your other debts. So your payments may end up being cheaper and easier to manage month-to-month. But they will last longer this way and this means that you may well end up paying more overall.
Of course, if you do consolidate using a loan, you need to make sure that you can afford the new payments, or you’ll just end up struggling with one big debt rather than lots of little ones. If you misjudge your budget, you might find that you’re still relying on credit cards to get you through the month and the balances increase again. And if the new loan is secured against your house, you run the risk of losing your home if you don’t keep up with the payments.
A loan isn’t the only way to consolidate your debts. It might be better for you to start a debt solution instead. There are a few different solutions, so make sure you do your research and speak to an expert before you make any decisions about which one is right for you.
Let’s look at a Debt Management Plan (DMP) as an example of how a debt solution can allow you to make one payment towards all your debts. With a DMP, you ask your unsecured lenders to accept a lower payment every month. You’ll still pay back all your debts, but over a longer time period and at a rate that’s affordable for you.
You’d make one payment to your debt solution provider, based on your affordability and they would distribute this on a pro rata basis to your creditors. This means that the creditor who’s owed the most would get the most of your payment and so on and so forth.
So with this plan you’ll have peace of mind that you can afford your payments and you’ll just be making one each month. It is possible to arrange to pay your lenders less each month directly yourself – you don’t have to use a debt solution provider. But you would have to speak to each one separately and you’d still have all the payments to keep track of.
Some other debt solutions involve writing debt off, if you can’t afford to repay everything you owe. There are a range of solutions available that can consolidate your debts, which one is right for you just depends on your particular circumstances – it’s always best to get advice on the different options.
Other things to consider with consolidation
The payment you make on a Debt Management Plan (DMP) only goes towards your unsecured debts. You’re not allowed to include secured debts. Whereas with a loan, you can technically consolidate secured and unsecured debts as you’d be paying them all off with the loan.
But don’t think that you have to get a consolidation loan if you have secured debts. If you started a DMP for example, your payments towards your unsecured debts would always be carefully calculated, so you still have enough money to make your secured payments each month as well.
Unlike a consolidation loan, debt solutions will have an effect on your credit history. Any debt solution will show up on your history for at least six years and however long your solution happened to last. This could affect how easily you can obtain credit in the future and how much you have to pay in interest, as lenders may see as you more of risk to lend to.
If you already have a damaged credit history, this may stop you being able to take out a new loan. The new lender may decide that they don’t want to lend to you because you’ve had difficulty paying debts in the past. Or they may charge you such a high rate of interest that it doesn’t make financial sense to take the loan out. And if you missed payments and defaulted on the new loan, this would also have a negative effect on your credit history too.
Hopefully that’s clarified what debt consolidation is and the different ways it can be achieved. Just scroll down and you can use any of the options to contact one of our advisors here. They can explain debt consolidation in even more detail and tell you which method of managing your debts is right for you.
by Christine WalshBack to blog home