The purpose of Debt Consolidation is to reduce your debt and reshuffle it to make it more affordable to pay off.
Debt Consolidation works by combining multiple debts into one manageable pot. For example, if you have numerous debts that have a combined total of £10,000, you can get a single £10,000 loan to pay off those debts. You then would repay the £10,000 loan in one single monthly repayment.
Debt Consolidation can also reduce the interest you need to pay by having all your debt in one pot, at a lower interest rate.
Overdraft loans can take different forms, such as cash advances, business debt, and credit card debt. Keeping track of various debts and the interest required to be paid on them can be exhausting and time-consuming.
You may have various debts from different providers, but these debts are first paid in full before monthly repayments are made to a single provider. This way you are only accountable to one provider, keeping things simpler and straightforward.
For example, Sarah has a credit card with Santander, an overdraft with Barclays, and an asset finance loan she’s taken against a product. Consolidating these debts into a single loan allows Sarah to gradually chip away at her debts to one single provider.
Another example would be Ahmed, who takes out two business loans with the same provider. He now wants a third to invest further into his business. Just like Sarah, Ahmed can consolidate the loans he has already taken into one, straightforward loan from a single provider.
WHAT ELSE CAN DEBT CONSOLIDATION BE USED FOR?
Examples of different types of debt a consolidated loan can be used to combine:
- Credit card debt (consolidated loans help reduce the impact of the high APR - annual percentage rate - charges most credit cards have).
- Personal loan debt (these are often used to fund a car purchase, a holiday, or home improvements).
- Overdraft (most banks charge high-interest rates on overdrafts which can lead to substantial debts that can be financially crippling).
- A Store Card (like credit cards, store cards often have high APRs and fees, despite initially offering front-end discounts).
- Payday Loans (loans which can be paid directly into your bank account but have high-interest rates attached that can make repayment difficult).
- Bailiff debt (such as unpaid Council Tax bills, parking fines, court fines and county court, high court or family court judgments).
First, you’ll need to establish the total sum of your existing debts.
You can then take out a loan which will cover the total cost of the outstanding debt. When you’re looking for a new provider for a debt-consolidating loan, you will want to find a loan that works with your budget.
The idea is to create straightforwardness, simplicity, and manageability by consolidating your debts. So when choosing a new loan provider you’ll want to pick a loan repayment plan which is manageable within a reasonable time frame you know you can pay the loan back in.
Like any other loan, a debt consolidation loan is available in two forms:
AN UNSECURED LOAN
This is a personal loan that does not require an asset, such as your home, to act as security for the loan.
A SECURED LOAN
This is a loan in which you attach an asset, like your home or a car, as security. In the instance where you are unable to repay the agreed-upon loan, the loan provider can repossess the asset put forward by you as a security, where they can then sell it and recoup the loan by another means.
THE PROS AND CONS OF DEBT CONSOLIDATION
BOOSTING YOUR CREDIT SCORE
Keeping to a single monthly repayment consistently will improve your credit score, giving you greater financial flexibility into the future. Alternatively, your credit score may be at risk if you cannot meet the monthly repayments.
LOWER OVERALL INTEREST RATES
Debt consolidation loans often have lower APRs than alternatives like payday loans, or credit cards.
EASIER DEBT TRACKING
Managing one repayment a month is much easier than several at a time.
YOUR ASSETS MAY BE AT RISK
If you choose a secured loan any asset you use as security for that loan will be at risk. This could be your home, car, or any asset the loan provider can reasonably be expected to sell should you be unable to meet the monthly loan repayments.
WAYS TO CONSOLIDATE DEBT
O% INTEREST, BALANCE-TRANSFER CREDIT CARD
Balance-transfer credit cards are designed to let you move existing debt from one credit card - or several - to another card from a different provider. The purpose of this is to pay less interest on the transferred money. By doing this you will be able to clear your debt faster, because all of your repayments will be going towards paying off your debt, instead of being used to cover the interest.
When you receive a balance-transfer credit card you pay off the balance on your existing credit card using the new credit card. You then make repayments on your new balance transfer card to pay off the debt.
By using a 0% balance transfer card, you won’t be charged interest on the transferred balance for the duration of the interest-free period.
A DEBT CONSOLIDATION LOAN
A debt consolidation loan can help you gain greater control over your finances. Debt consolidation loans often offer terms between one and five years. In general, longer loan terms require you to borrow a more significant amount of money, so they may not be available if your consolidation loan is less than £10,000.
FEES AND CHARGES FOR DEBT CONSOLIDATION LOANS
It’s important to be aware of some of the high fees some companies charge for arranging a loan. You should read the small print carefully for any extra fees or charges before you sign anything. Check to see if there are any costs associated with paying off the existing loans early. This could cancel out any savings you make. Avoid paying a fee for a company to arrange the loan on your behalf, that is, unless you’re receiving advice and you’re sure it's worth the cost.
IF YOU CHOOSE A DEBT CONSOLIDATION LOAN
Get advice before you make a final decision. If you choose to go ahead with a consolidation loan, it may be worth talking with an independent financial adviser who might be able to find the most suitable product for your needs. Avoid just looking at the annual percentage rate (APR), or the annual percentage rate of charge (APRC) for secured loans. The APR is the interest you’ll be charged, and the APRC will include the extra costs such as an arrangement fee.
Qardus does not provide financial advice.