If you have a lot of debts or are paying off a number of different lines of credit, you may be thinking about some form of debt consolidation in order to make it easier for you. Often those who have a lot of credit – e.g. multiple credit cards and loans turn to debt consolidation in order to reduce their repayments into lesser, more manageable payments each month. Debt consolidation is handy if you’re planning on paying off your debts or have reached the maximum limit of your credit, and you can also get debt consolidation in the form of debt management plan or other scheme if you’re having trouble paying your creditors back. Read on to discover exactly how debt consolidation works and how it can help you.
In Simple Terms
Debt consolidation, put simply, is when you take each of your individual lines of credit and merge them together into one single easier to manage loan. You can take out a bank loan in order to do this or even a credit card that will allow you to transfer your current credit card balances onto it. You may also want to consider secured borrowing, for example taking out a loan that is secured against your home.
Things to Consider
As when taking out any line of credit, if you’re thinking of applying for a debt consolidation loan it’s vital to consider the monthly repayments and ensure that you’ll be able to comfortably afford them. Because you are combining your existing debts into one loan or credit card rather than multiple lines of credit, debt consolidation loans will often cost less than you are currently paying for your lines of credit combined as there will be less interest involved. However, you should always have a good idea of how much you’ll be expected to pay per month as minimum and ensure that this fits in with your household budget. If in doubt, speak to your lender or financial advisor who’ll be able to assist in setting a budget and repayment plan out.
“If you are struggling to make repayments or are no longer able to get credit due to a poor credit rating, you may find it difficult to be accepted for a loan in order to consolidate your debts.” – Consolidation Deal
Thankfully, there are a number of alternatives available that work in a similar way. One such alternative is a Debt Management Plan (DMP), where a financial management company takes over all of your debts and comes to an agreement with your creditors regarding paying a reduced amount. You will be expected to pay a monthly payment which will then be distributed amongst your creditors. The amount that you pay will depend on the amount of debt that you have and your income and expenditure. You may also be required to pay a fee to the debt management company, although some offer DMP services for free.
If you do decide to take out a loan to consolidate your existing debts, it’s crucial that you don’t let temptation get the better of you and start to apply for and take out new lines of credit whilst you’re paying off your consolidation loan. This will only cause more expenditure for you, and can lead to late or even missed payments which will have a detrimental effect on your credit rating. If you’re taking out a loan against your home in order to consolidate your debts, it’s important not to take out any further lines of credit that could become a drain on your finances as missed payments on your consolidation loan could result in you losing your property, even if you ll take cheap home loan.
Deciding If It’s For You
Every person’s individual situation is different, which is why it’s important to decide whether or not debt consolidation is for you before you take out a loan. There are a number of other options available if you’re struggling, and you should never take out a loan that you know you won’t be able to make repayments on. If possible, speak to a financial or debt helpline advisor and explain your personal situation as they will be the best people to advise you on which are the best steps to take.