Debt consolidation: Is it the right option for you?

Paying off multiple debts is not only stressful but can also be hard to manage. If you’re struggling to stay on top of your borrowing and looking for a more manageable solution, then debt consolidation could be the answer. It can help lower your monthly payments, simplify the repayment process and save you money in the long run.  

What is a debt consolidation loan?

A debt consolidation loan takes some or all of your debts and merges them together. This works by taking out a loan from a single lender to pay off your other creditors – you then pay back that lender with a monthly repayment.

There are two types of debt consolidation loans that you should be aware of:

Secured: This is where the amount you’ve borrowed is secured against an asset such as a house (also called a homeowner loan). This means that if you miss the repayments, you could lose your home.

Unsecured: This is when the lender has no claim over your assets and won’t be able to seize them if you miss your repayments. However, you could still risk legal action, so it’s important that you make your payments on time.

Secured loans are usually seen as an option if you have lots of debt or a bad credit rating. They can offer lower interest rates compared to other loans and also give you more time to pay off the debt. However, putting your assets at risk shouldn’t be taken lightly, and it’s worth seeking free debt advice before taking one out.

 

What are the benefits of a consolidation loan?

Debt consolidation loans don’t necessarily work for everyone, but for some, they can offer relief and provide many benefits. Some of these include:

  • Reducing the amount of interest you pay. If you currently pay high interest rates on store card debts or payday loans then paying back interest to a single personal loan could work out more cost-effective.
  • Tracking your repayments more easily. Having all of your repayments consolidated means that you just need to keep track of one repayment and one set of terms. So you’re more likely to keep up with repayments and could even pay off your loan faster.
  • Improving your credit rating. Being able to keep up with repayments every month can have a positive impact on your credit rating which will make borrowing easier in the future.

 

Is a debt consolidation loan right for you?

Sometimes a debt consolidation loan can mean that you end up paying back more money. This can happen if:

  • The interest on the debt consolidation loan works out more than the interest on your current debts. This might be the case if your current interest rates are relatively low.
  • You can’t afford the monthly repayments. Consolidating your debts could result in higher monthly repayments that you can’t afford so it’s always worth checking this out first.
  • Your loan repayments will take longer to pay off. Sometimes these can be spread over a longer duration – which means your monthly repayments might be lower – but you could end up paying back more over time.

Before taking out a consolidation loan, it’s important to assess your situation and look at your options. This means doing your research and finding out what a debt consolidation loan will mean for you. Shop around and use comparison websites to find the best deals and always read the small print – especially when it comes to looking at interest rates, fees and terms of repayment. You should also check if your employer has an employee loan scheme, which may be better value compared to other options. Looking at all the solutions available to you, and the pros and cons of each one, means you can make the right decision and better manage your debts.