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What is debt consolidation?
Debt consolidation is the process of combining multiple existing debts into a single interest repayment plan. One such method is to use a debt consolidation loan.
For example, you can have several credit cards, a personal loan and a transfer. If each loan has a different interest rate and repayment date, it can be difficult to keep track of all your expenses. Debt consolidation can help you simplify your bills and take better control of your finances.
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What is a debt consolidation loan?
Debt consolidation loans, or debt loans, allow you to pay off debts from multiple lenders by combining them into a single loan from one provider.
Imagine you owe £4,000 on a credit card, £2,000 on a car loan and £500 on an overdraft, all at different interest rates. You can apply for a consolidation loan of £6,500, use it to pay off existing debts, then pay a certain amount each month towards your new loan until your debts are paid off.
This type of loan can be beneficial if you find one with a lower interest rate overall, as it can reduce the total interest you pay on the outstanding debt.
However, taking on new debt means paying interest for longer. Single monthly payments and low interest rates may be easier to manage, but they may cost you more overall.
Debt consolidation loans come in two forms: secured, where you secure the loan against an asset like your home, and unsecured, which means you don’t have to put up anything as collateral. You can get better interest rates with a secured loan, but you risk losing your home if you can’t make your payments.
Before offering you a loan to consolidate debts, a lender looks at your outstanding debts and your credit history.
What are the alternatives to a debt consolidation loan?
If you feel like a debt consolidation loan isn’t right for you, there are a few alternatives you can consider:
0% balance transfer card
If you’re looking to consolidate credit card debt, a 0% balance transfer card means you can transfer your debt onto one card and get the benefit of not paying interest for a set period of time.
However, if you don’t think you’ll be able to pay off your debt in full before the initial 0% interest rate ends, then this option may not be right for you.
Mortgage refinancing
If you have enough equity in your home, refinancing your mortgage can free up some money to pay off your existing debt. This may mean you need to extend the term of your mortgage. If you default on your loan, you risk losing your home.
Debt management counseling
If you’re having trouble paying off your debt, talk to a debt counselor. They can help you find ways to control your finances and pay off your debt in affordable monthly payments. Options include:
Debt management plan – an agreement between you and your creditors to pay off all your debts in affordable monthly payments.
Administration order – if you owe less than £5,000 and have a County Court Judgment (CCJ), you can apply for one payment a month to your local court. The court will then distribute the money between your creditors.
Individual Voluntary Arrangement (IVA) – an agreement to make regular payments to an insolvency practitioner, who will then distribute the money between your creditors.
