Is debt consolidation the right option for you?

Debt consolidation works by combining multiple different debts into one, more manageable loan.

If you have a number of personal loans, credit card balances or HP, debt consolidation can help. A debt consolidation loan can mean that you don’t have the hassle of thinking about making numerous repayments, instead only having to make one payment that covers the cost of all your debts combined.

Debt consolidation can save you money by transferring debts from high interest products such as personal loans and credit cards on to loans with a much lower rate – often meaning that you are able to pay off your loans quicker.

For example, many credit cards charge 30%per year or more. If you have debts with high interest rates, you may find that your debt reduces very slowly – despite you making your regular repayments. If this is the situation you’re in, a consolidation loan is often a better option as it may reduce the interest rate you are paying on your borrowing.

But while debt consolidation can be a really handy way of managing your money, it isn’t always the right solution for everyone. Consolidating debts is appropriate when:

  • You have multiple personal loans, credit cards or HP
  • It reduces your monthly repayments to an amount that lets you comfortably cover your living costs while still paying back the debt.
  • It helps you manage your finances

Debt consolidation can be helpful if you have a lot of debt for a number of reasons

If you are having problems making the repayments on your existing credit cards and loans, debt consolidation can help. If your budget is tight, this can have the effect of making you miss payments, which leads to having to pay late fees and more interest. A debt consolidation loan can, in many cases, lower the amount you pay back every month, making it easier for you to stay on track with your money.

Whether a debt consolidation is right for you depends on your situation. And while there are plenty of benefits to consolidating your debts, as with any borrowing it’s important that you research the options and make sure that it’s suitable for you.

Debt consolidation loans can be secured or unsecured. An unsecured debt consolidation loan may have a cheaper rate than any current debts you have, especially if you are borrowing on credit cards. You will also be moving your debt to a loan with regular repayments of interest and capital, meaning that the balance will be reducing each month – something that isn’t guaranteed with other types of credit.
However, if you are a homeowner, you may find that a second mortgage may be a better option for debt consolidation for you.

A second mortgage would be secured against your home. If it was secured, a debt consolidation loan would typically be available at a lower rate than an unsecured debt consolidation loan. This is because the lender would be taking less risk. second mortgages are also available for larger amounts and longer terms. Unsecured debt consolidation loans may only be available for relatively small sums and need to be repaid over 5 – 7 years as a maximum

Secured debt consolidation loans can be much larger, allowing customers with larger balances to consolidate all of their debts and available over longer terms, with up to 25 or 30 years being an option. If this is the case, you can reduce your monthly payments significantly, freeing up more of your monthly income for the essentials

However, remember, the longer you take to repay your debt consolidation loan, the more you may end up repaying in total – and if you secure the debt consolidation loan against your property, if you can’t pay it back, your home could be at risk of repossession.

What if you’ve got a bad credit score?

If you’ve got a bad credit score, your chances of being accepted for an unsecond mortgage for debt consolidation may be low. If you are accepted, the lender may not be able to offer you their best rate.

But that isn’t always the case with secured borrowing. Even if you’ve got a low credit score and poor credit history, you may still be accepted for a second mortgage. This is because the loan is secured against your home, which gives the lender a level of security and assurance that they’ll get the money back. Unless you pay it all back, the creditor can sell your property to recover the costs.

Consolidating your debts may also help to improve your credit score. This works in a number of ways. By making regular payments on your consolidation loan you will be showing other lenders that you’re a reliable borrower.

Your credit score may also be improved with a debt consolidation loan as you’ll be using it to pay off multiple credit cards and loans, strengthening your credit rating.