What is debt consolidation?
Debt consolidation allows you to replace multiple loan and credit card payments with a single monthly payment. The new monthly payment is often lower than the combined value of your previous monthly payments. This is achieved in a number of ways:
- Lower interest rate applied to the outstanding loans
- Outstanding loans are repaid over a longer period
- Some debts may be written off, or a settlement may be made with creditors whereby you pay back less than the original outstanding amount
Debt consolidation loans can be secured or unsecured. Unsecured loans tend to attract higher interest rates than secured loans, since they are more risky for the lender.
Advantages of debt consolidation
- Consolidating debts can reduce your overall monthly commitments, leaving you with more disposable income.
- Consolidating your debts into a single repayment makes it easier to manage your debts, reducing stress.
- Credit cards, store cards and overdrafts often charge excessively high interest rates. By consolidating your debts into a single loan or mortgage, your can reduce the interest rate you pay, saving you money.
- By consolidating your debts using a loan or mortgage, you can reduce your monthly outgoings without affecting your credit rating.
- You can arrange a loan with a fixed repayment term, giving you peace of mind knowing exactly when your debts will be repaid.
Disadvantages of debt consolidation
- Consolidating your debts through a re-mortgage of your home may extend the term of your mortgage, which may affect your financial situation in retirement.
- Consolidating through a re-mortgage will also use up much of the equity you have built up in your home over the past few years.
- Consolidating your debts may not get to the underlying cause of the problem, i.e. your spending habits, and as a result you may find yourself needing a further debt consolidation in the future.
- You need to be careful when selecting a lender to help you to consolidate your debt. There are some less than scrupulous lenders out there who may be driven to make a large profit for themselves t the expense of you best interests.