What You Need to Know About Consolidating Debt

The option to consolidate debt can often be one of the quickest and easiest solutions to the stress of trying to pay off numerous creditors. You might feel overwhelmed trying to juggle store cards, credit cards, car finance packages, student loans and overdrafts. You might be missing payment deadlines and incurring penalties and interest. The situation might be getting out of hand and becoming worse every month.

Debt consolidation can stop this.

But what exactly is involved when you consolidate debt and how do you know if it is for you? Below are some of the most common questions people ask when they’re considering debt consolidation.

Do I have to be a homeowner to consolidate debt?

Not at all. It is possible to consolidate debt even if you don’t own a property. There are many excellent unsecured loans out there that will allow you to borrow what you need without using your property as security.

However, there are some instances when being a homeowner would help you to consolidate debt. There is a legal borrowing limit of £25,000 on unsecured loans (depending on your individual circumstances), so homeowners that need more than this may have to withdraw equity from their home or use it as security for a debt consolidation loan. One advantage of the latter is the amount of money loaned is often much larger than with unsecured loans – in some instances up to £75,000. And often the interest rate is lower than with unsecured debt consolidation loans too.

Can it lower my monthly payments if I consolidate debt?

Debt consolidation loans typically carry a lower interest rate compared to many other forms of credit. If you consolidate debt by taking out a low interest loan to pay off your creditors, you will be left with one simple lower monthly payment to your new loan provider.

For example, let’s say you have £9,280 of debt spread across five different credit cards and store cards and are being charged typically high APRs. Your monthly repayment might be between £400-£450 and you could be struggling to get by every month with no end in sight. If you chose to consolidate debt and obtain a 5-year loan with an APR of (for example) 7.9%, you could lower your monthly payment to a more manageable £190 and see a debt-free future ahead of you.

Are there any disadvantages?

Debt consolidation is a valuable tool if you are serious about dealing with your debts. The choice to consolidate debt is not for everyone though. If you use your house as security on a debt consolidation loan and fall behind with the payments, your home could be repossessed. If you clear your debts with a debt consolidation loan the temptation is there to start using credit cards, store cards and other loans as extra spending money again.

Will my creditors stop harassing me?

When you consolidate debt your creditors will be paid in full so there will be no need for them to contact you. Unlike juggling extra payments to numerous lenders who want their money and can be unpleasant until they get it, debt consolidation can provide a fast route to getting them off your back once and for all and stop them contacting you. When you roll all of your debts into one debt consolidation loan, you will only receive communications from your loan provider.

If you’re feeling stressed and unhappy by the behaviour of your creditors and don’t feel able to deal with them effectively, taking the step to consolidate debt could be the right one for you.

Will my credit rating be affected if I consolidate debt?

As long as you keep up your payments on your debt consolidation loan and be careful how you use credit in the future, your credit rating will not be affected. You could even look forward to it improving over time as you pay more of your loan off.

What types of debt can be consolidated?

Store cards, credit cards, catalogue accounts, car loans, purchase agreements, student loans, gas and electricity arrears…the list is endless. Whatever you owe, there’s a very good chance you can effectively consolidate debt to control and manage it all.