How Do I Consolidate My Debt? – Easy Step-by-Step Guide with Tips, FAQs & More

Have you been struggling to repay your debt as of late? 

Are you in a situation where you have a number of outstanding debts, each with growing amounts of interest and you’re finding it difficult to deal with all of them?

If so, debt consolidation is something you should learn about.

Let’s discuss all you should know.

Debt Consolidation Loans

Debt consolidation, to put it simply, is a procedure where you calculate the total amount you have to repay on each of your individual debts and apply for a personal loan worth that exact amount, most probably at a lower interest rate.

A debt consolidation loan technically allows you to combine all your existing debts into a single debt that you can make easier monthly payments towards, at a much easier interest rate.

As for the specifics, there are two different types of debt consolidation loans: secured and unsecured.

A secured debt consolidation loan is one where you need to put up some asset of yours as collateral towards the debt. If you fail to repay the debt, that asset will be taken from you. 

If you have a considerably bad credit score, it’s possible that lenders will want your house or vehicle as collateral.


On the other hand, an unsecured loan is one where you don’t have to put up an asset of yours as collateral towards the debt.

how do i consolidate my debt

Is it a Good Idea to Consolidate Debts? – Pros & Cons

This section will explore the potential advantages and disadvantages of consolidation.

In certain situations, consolidating your debt can be a very good choice. Depending on the circumstances, it can also come as a burden. Let’s explore some of these scenarios.

ProsCons
Consolidating your debt makes it much easier to keep track of your monthly payments and where your money is going.

You can boost your credit score with a consolidated debt since it’s easier to make a one-time payment in full.

It can get you much lower interest rates. Debt consolidation loans tend to have a much lower APR than some other common types of loans.

You may have to pay back much less on a monthly basis because if you have a lot of debts and all of them are accruing interest, they’ll probably cost you more than a single loan at a lower interest rate.
Sometimes, it can be difficult to keep up with the repayments on a secured personal loan. If so, you may run the risk of losing your car or your house.

Certain set-up costs can be rather expensive and can possibly drill a hole in your pocket.

If you have to take out a very large personal one, possibly one you’ll miss a few repayments on, it can do a number on your credit rating.

Certain alternative options are better suited to smaller debts, or debts at lower interest rates, such as 0% balance transfer credit cards.

Getting the Right Debt Consolidation Loan

How do you know you’re getting the right debt consolidation loan? 

There’s a number of things you can do to decide if the loan you’re getting is right for you.

For one, you need to be sure of exactly how much you need to borrow. The easiest way to be sure of this is to calculate the amounts of all your debts and add them into one. Be sure to add up interest charges as well, since interest can easily get out of hand if ignored for too long.

Secondly, determine the amount of time you’ll need to pay back what you’re borrowing.

To do this, look at all your sources of revenue, your expenditures, and other facets of your long-term financial situation.

If you take a long amount of time to pay your debt back, you’ll have to pay back considerably less each month. That isn’t exactly a positive sign, since if you take longer to pay it back, the more you’ll be paying back as a total amount.

Finally, when you’re looking for the right personal loan, look at the interest rates you’re being offered.

Remember that at the end of the day, the interest is going to be the largest cost you’ll be repaying on your personal loan.

You’ll find that the interest rate you’re offered varies according to your credit rating, your borrowing history, and a few other factors and conditions.

How to Consolidate Debt into One Payment? – Possible Options

In general, there are two primary ways you can go about consolidating your debt.

Both of these options are structured to condense your payments into a single monthly bill.

  • The first option at your disposal is to get yourself a balance-transfer credit card at 0% interest. Then, you can transfer all your outstanding debts to this card and try to repay the amount during the card’s promotional period.
  • Alternatively, you can choose to borrow a fixed-rate debt consolidation loan. The way it’ll work is that you can use the loan to pay off your outstanding debts, and then focus on paying back the loan in instalments over a fixed period.

There are a couple of other, less popular ways to consolidate your debt as well.

One way to do this is to take out a home equity loan, but it involves the very real risk of you losing your home. 

Another option is a 401(k) loan, which involves a solid risk to your retirement plans.

Effects of Debt Consolidation on Your Credit Report

Debt consolidation affects your credit rating in a couple of ways.

First off, it can improve your credit rating if you’re able to use the money to pay back your loans.

In general, making repayments is good for your credit rating.

However, at first, it may worsen your credit rating, owing to the fact that, technically, you’re taking a personal loan that is potentially worth a lot.

So if you’re sure you can pay your debt back with what you’re borrowing, take the chance and attempt to consolidate your debt.

However, if you’re unsure about making repayments even with the personal loan, it may not be such a great idea.

Alternatives to Debt Consolidation Loans

This section covers some of the alternatives you can consider if you feel that consolidating your debt is not the route you want to choose.

  • A 0% money transfer card: You can use a card like this to transfer money to your account and then pay it back, interest free, over time.
  •  A 0% balance transfer card: These cards are a very good option for people with credit card debt. The way it works is that you can transfer your credit card debt to these cards with a small transfer fee, and then focus on paying them back, interest-free.

There are other alternatives if you don’t want to consolidate your debts, such as taking money from your mortgage payments and using it to pay back other debts. 

Mortgage payments are generally long-term, so using money from that source instead of choosing to consolidate debt is an option some people go for.

FAQs

Can I get an unsecured debt consolidation loan?

Yes.

It is possible to get an unsecured debt consolidation loan.

However, unsecured loans are generally harder to get than secured loans, especially if you have a poor credit rating.

Also, you’re likely to get them at higher interest rates than secured debt, since you won’t be putting up an asset of yours as collateral.

You may be chased around by debt collectors seeking repayment on your unsecured loan. You need to be prepared for that particular confrontation.

When should I not consolidate debts?

If you have a small debt and you can pay it off in six months to a year, and if the interest rate is low, a consolidation loan probably isn’t worth it.

You won’t save much because of it, if at all. You may even have to spend more on the fees and charges associated with consolidation.

Also, if you’re overwhelmed by debt and know that even a consolidation loan won’t be enough for your repayments, you should probably look elsewhere, such as insolvency options or a DMP.

How long does debt consolidation stay on your credit report?

Like a lot of other personal loans, such as credit card loans or other loans, a debt consolidation loan will stay on your credit report for a period of six years, starting from the date when you pay off the loan or the date when you default on the loan,

How does my credit score affect my chances of getting a consolidation loan?

Your credit report actually has a lot to do with the conditions attached to your consolidation loan, if you manage to get one in the first place.

A poor credit report will possibly come with stricter terms and conditions. For instance, your creditors may demand a much more valuable asset as collateral if your credit report is poor and you’re seen as an unreliable borrower.

Other than that, seeing a poor credit report may push creditors to give you loans only on very high interest rates.

On the contrary, if you have a good credit rating, you may even be able to get unsecured loans and loans on much easier conditions.

If you need any debt advice in this regard, you can seek debt advice from independent charities such as National Debtline and StepChange.

Finally

Getting a debt consolidation loan as a large sum to repay all your debts can be tricky business.

This guide was designed to make sure you can work your way through the various conditions and technical details associated with these loans.

If you need more debt advice, feel free to reach out!


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