New rules on credit card debt: what do they mean for me?
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When you’ve consolidated your debts, will it affect your payments if your income goes up?
A debt consolidation loan isn’t a formal debt solution like bankruptcy or an IVA, but of course that doesn’t mean it should be entered into lightly. If you’re able to afford the payments, it means that you can manage your problem debts without affecting your credit history. But what will happen if your situation starts to improve?
If you start earning more, you might worry that you’ll have to start paying more towards your debt consolidation loan. Let’s take a look at your options:
Changes to your income
You might get a pay rise or take on a few extra hours at work. Maybe you’ve got a better job, or started receiving more benefits. Whatever the reason, it means you’ll be earning more each month, which means you’ll have more money to live on and to put towards clearing what you owe.
Or maybe you’ve got a PPI compensation pay out or inherited a lump sum of money. This will mean you’ve got quite a bit of cash in the short-term which you could put towards your debt consolidation loan, but it probably won’t make much difference to your long-term disposable income. If you’ve got enough, you might even be looking to pay off your debt consolidation loan early.
Will payments be affected?
The good news is that debt consolidation loan repayments are not usually linked to your income, so you are not required to increase them if your income rises or you get a lump sum. Providing you continue to make the agreed repayments for the term of the loan then you know that you’ll clear it within the agreed term – and that’s fine.
However, whether you’ve got a lump sum, or more regular income coming in it mighty make sense to put all or part of it towards clearing what you owe or increasing your monthly payments.
Why might it be a good idea?
If you repay your loan early you may be able to save yourself some of the interest that you would have paid over the full term. So it may actually cost you less.
If you have other outstanding loans or credit then it is worth considering whether you should put the money towards that first. For example if you have a high interest credit card it would be better to clear that then a less costly consolidation loan. Similarly if you are behind with a priority bill like rent or council tax, or in arrears on your mortgage clear those before your consolidation loan.
Paying a lump sum
Whether your debt consolidation loan is secured against your property, or is unsecured, you can ask your lender how much it would cost to clear it. Check with them whether there is any early repayment charge. You may still decide to clear the loan – but you need to know what it is.
Even if you can’t pay off all the loan you may be able to pay some of it off. If you do, your lender may give you the choice of keeping the term of the loan the same and reducing your monthly payments. Or you may be able to keep your payments the same but pay off the remaining balance more quickly.
Increasing your monthly payments
If you think you might be able to afford to pay a bit more each month then speak to your lender about doing so. That should mean that you are able to clear what you owe more quickly – saving you some of the interest that you would otherwise have paid.
Before you do agree to a higher payment make sure that you are happy that it is sustainable for you. You don’t want to find that in a few months’ time your income has dropped and you are struggling to make the higher repayments you agreed.
by Christine WalshBack to blog home