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Debt Consolidation

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

Debt consolidation is a technique used to merge debts together, make repayments easier to manage and potentially save money. 

Debt consolidation is when a debtor with multiple debts takes out new credit to pay off their existing debts in full. After doing so they will have reduced their number of creditors, possibly to a single debt. This makes budgeting for monthly debt repayments more manageable and hopefully mitigates the chances of further missed payments. It might also be done to secure a lower interest rate for long-term savings. 

The pros

  • Debt consolidation reduces your number of creditors, making it easier to budget for monthly repayments
  • Securing a favourable interest rate could save you money on the amount of interest you are paying each month
  • Debt consolidation can be achieved with loans or a balance transfer credit card (when consolidating credit card debts)

The cons

  • Debt consolidation doesn’t solve underlying issues that caused debts to materialise
  • There may be fees and charges to pay when consolidating debts, such as loan early repayment fees or balance transfer fees
  • There could be a more suitable solution for your situation, which should be discussed with a debt adviser

Debt Consolidation – Complete Breakdown with FAQs, Guide, Advice & More

If you are looking for a way to manage your debts, debt consolidation might be a good idea but I know that you might not fully know what it is or how it works.

In this article, I am going to tell you what you need to know about the debt consolidation loan, the techniques to use it, and its legal and financial details.

What Is Debt Consolidation?

A debt consolidation loan is a modern refinancing technique that uses finance to pay off various debts. In simple terms, you are asking for money from one lender to clear the debts of existing lenders.

Debt financing is a viable solution for many if used and understood comprehensively. Not everyone needs to consolidate their debts and neither is every loan consolidatable. Therefore, you must make sure that you take a debt consolidation loan only when you need it.

What is the Best Loan to Consolidate?

I have covered this question in depth in my other post, but I must emphasise again that there are many loans that you can easily decide to consolidate, however, it’s normally advised that you consolidate only the short term loans. Such as:

Credit Card Debt Consolidation

The loans that you should consolidate are the ones with high-interest rates, such as credit cards, payday loans, etc. This is since short term loans have relatively 30% to 40% higher monthly repayments of interest.

If you can eliminate these debts, you can manage your monthly repayment easily and as well as the total amount of debt.

Get a detailed analysis of your credit card debt by giving a visit to this article.

Techniques to consolidate debts

Various financing techniques are used to consolidate debts, the most common ones, however, are the taking of loans through companies and banks. These financing options include:

Debt Consolidation Mortgage

This debt consolidation loan helps you pay off your loans, allowing you to amalgamate your loans to one lender as a mortgage. This technique is extremely useful if you are facing problems paying the monthly repayments and if the interest payments are sucking in all your money.

A Consolidation mortgage will make sure that you effectively start to pay back your principal interest amount.

debt consolidation

Remortgage for debt consolidation

Remortgaging is a debt amalgamating technique in which you reset your mortgage terms. It means that you can negotiate or change the amount which you had originally taken as a principal, and hence try to work out a better deal for yourself.

The remortgaging comes at a higher cost due to the increased interest amounts and payments that are attached to it.

Personal Loans

Taking out a personal loan as a debt consolidation loan is also a preferred choice for many. Personal loans can be taken out for the long term hence, the interest payment upon it would be comparatively less.

Before you take out a personal loan for consolidation of debt. Make sure you calculate the annual aggregate APR.

However, you must be careful with personal loans. Interest rates can be crippling, and if you’re not careful you could find yourself paying back extortionate amounts like with Loans2Go, which has a 937.8% Max APR.

Before you take out a personal loan for consolidation of debt. Make sure you calculate the annual aggregate APR. If the APR is lower than your various debt interest repayments, then it would be a feasible option. Otherwise, you might not get any benefit by consolidating your debt.

How Do I Consolidate my Debts?

The easiest way to consolidate your debts and learn the specifics of the interest rate, repayments and the loan amount, is to use the Debt consolidation calculator. If you still have any doubts regarding it, please refer to this article.

Debt Consolidation Calculator

A debt integration calculator is an online tool that is widely available on many lending institutions’ sites, this tool helps you get an estimated quote for your debt consolidation loan. It also helps you to decide whether consolidating your debts is viable for you or not.

It shows the detailed financial aspects of the debts and consolidation loan, which makes it quite easier for you to make a decision.

Debt Consolidation Loans Eligibility Criteria

The eligibility criteria vary for every company and bank, so there is no specific outline. However, the most common criteria are that the borrower should be a UK national and over the age of 18.

Apart from these, many institutions require a good credit rating as well.

To read about detailed eligibility criteria, visit this article.

What to Do If You Can’t Consolidate Your debt?

The best way to manage your debts in such a situation is to avail of the grants and offers that are provided by the Government. The Government of the UK believes itself to be a welfare state, hence, they are always ready to aid people who need help!

Get a loan on benefits

You can apply for benefits, which means that the government will pay you either if you are jobless, ill, disabled, or in need of extreme financial help. The government has recently given out loans to NHS workers and people who got economically affected by the coronavirus.

Thus, you can always look to the government if you need help. If you want to find out more about benefits and loaning, you can do so by clicking here.

How Do Debt Consolidation Companies Work?

To consolidate your debt, you will need financing. To provide this finance, debt amalgamation companies play an important role. They work as a lender and earn profits through interest payments. The most widely used loans through debt companies are:

Bad Credit Consolidation Loan

Some debt companies are working effectively to help people out of debt, they have introduced loan schemes which are good for people with bad credit ratings.

If you are someone who has a bad credit rating and you can’t seem to find anyone to loan you money, the debt companies might be able to help you.

However, with such loan schemes, the interest rates are usually double because of the fact of a high risk of the borrower not paying back.

I have covered this specific loan in my other article as well.

Unsecured Debt Consolidation Loans

The Unsecured Debt Consolidation loans are also a popular choice among many. It provides loans to people without depositing any kind of collateral or security. These borrowing options are usually short term and also demand high-interest payments.

Check here to learn about the top 5 debt consolidation loan companies of the UK.

Conclusion

Debt amalgamation can work wonders if it is used in the right manner. Make it clear that you purposefully use this technique and don’t take any unnecessary borrowing schemes for consolidating your debt.

I hope this post was helpful. If you want to learn more about a consolidation loan, feel free to reach out. I’d love to help!

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