If you have outstanding debt on more than one credit line, for example loans, overdrafts and credit cards, then it can be a struggle to keep up with all of the monthly repayments, not least because you have to keep up with different bills coming in at different times.
That is why many people turn to debt consolidation loans as having the debt in one place makes it easier to manage. In addition, the monthly repayments can often work out to be cheaper.
There are a number of ways that you can consolidate your debts, for example through loans or remortgages, and each have their own advantages and disadvantages.
How to consolidate debt
- Unsecured loans – many lenders offer unsecured loans with interest rate levels that are well below those of credit cards. As the loan is unsecured you do not risk losing your property should you fail to make the repayments.
- Remortgage – your mortgage provider may allow you to borrow more money against the value of your property, although this has been harder to do since the credit crunch. This means that you are simply borrowing more money from the same lender and your home is at no further risk unless you cannot meet the new mortgage payments.
- Secured loan – as with an unsecured loan, these are offered with interest rates well below those offered by credit card companies. However, if you fail to keep up with the repayments on a secured loan then the lender will have a claim on your property after the mortgage lender has had their liabilities settled.
Advantages of debt consolidation
The major advantage of a debt consolidation loan is that you should be paying less in repayments each month, particularly if you are consolidating credit card debt. This is because the average APR should be less than the 20 per cent that is usually charged by credit card companies.
Taking out a debt consolidation loan can also make your debts more manageable and can make it easier to budget. This is because instead of receiving multiple statements from various lenders you will only have one bill from one lender.
Disdvantages of debt consolidation
If an outstanding loan is included in your debt consolidation then you need to be aware that your lender may charge an early repayment fee. In addition, when taking out a debt consolidation loan there may be a broker’s fee involved so these factors need to be taken into account when deciding to pay off debt with a consolidation loan.
Although interest payments are lower this could be because the debt is paid over a longer period of time so you may end up actually paying more in the long run.
By consolidating unsecured debt, such as credit cards, with a secured loan or remortgage, you do run the risk of losing your property if you do not keep up with repayments.
Debt consolidation does have it’s pros and cons so you should always consider these factors and maybe seek professional financial advice before undertaking any sort of debt consolidation.
It also makes sense to shop around for the best deal and try not to borrow more than you actually need as this can lead to further financial difficulty.