Debt Consolidation
Debt Consolidation is one of the potential debt solutions which you consider to deal with the problem of mounting debt. If you find yourself struggling to make the minimum payment to a variety of creditors each month whilst dealing with your usual outgoings, then debt consolidation could be the answer to your debt problems.
Consolidating your debt into a single monthly repayment can leave you with more money at the end of each month, while allowing you to plan a more sensible budget. As well as improving your cash flow, a consolidation loan could also help you to repair your credit profile as long as you keep up with your repayments.
The primary benefit of a debt consolidation loan is that it replaces a multitude of monthly outgoings with a single, manageable loan repayment. As the consumer, you don't need to make separate payments to various lenders, on different days throughout the month. You may also find that you will achieve a better rate of interest by shopping around and finding another lender to replace the many you already have.
More often than not, a debt consolidation loan will be a secured loan. However, unsecured debt consolidation loans do exist. Securing a debt consolidation loan against your property will often afford you a better rate of interest but you should also be aware that missing payments to your secured debt consolidation loan means your home is at risk.
A debt consolidation loan can be a great way to pay off credit and store cards; clear your overdraft and bank loans; and finish off those hire purchase agreements.
Who considers Debt Consolidation?
Debt Consolidation loans are usually taken on by someone who's in full-time employment but struggling with debt repayments, or are otherwise financially mature enough to realise what savings a debt consolidation loan can bring. It's important to remember that although the monthly payment may be lower, the repayment period will be longer. Studies by the Office of Fair Trading have found that the majority of individuals who apply for a secured loan give debt consolidation as their primary reason for doing so.
Advantages to Debt Consolidation
- The switch to a secured consolidation loan can potentially result in a lower rate of interest than your current unsecured credit.
- Chances are, you'll find that you are making a lower monthly payment.
- As you've consolidated your debts into a single loan, you only have one creditor.
Disadvantages to Debt Consolidation
- You may face early settlement charges on existing loans when you pay them off.
- You could well face broker fees and commissions.
- The overall borrowing could be greater if the loan is spread over a longer period
Debt Consolidation versus Debt Management
A Debt Consolidation Loan is essentially a new line of credit. A debt management plan looks at ways in which you can make your unsecured debts more affordable, without further borrowing.
A Debt Management company, like Harrington Brooks, may well be able to negotiate for a lower monthly payment by asking creditors to freeze or lower interest rates. We would also work on your behalf by distributing repayments across your various creditors.
All of your creditors have to agree to the proposed payment plan; otherwise the debt management plan will not go ahead.
Debt consolidation options
Instead of a debt consolidation loan, you may wish to consider one of the following:
Individual Voluntary Arrangement (IVA) – A legal agreement between you and your creditors to repay a portion of outstanding debt and avoid bankruptcy.
Remortgages – Switching to a new lender with a lower rate of interest could allow you to use the equity to pay off your existing debt.
Debt Management Plans – These plans allow you to make just one monthly payment to the Debt Management Company but over a longer period.
Bankruptcy – Bankruptcy can free you from debt that you simply can't afford. Your assets are sold off to pay creditors and you could lose your home. Therefore bankruptcy should always be seen as a last resort.
Other important things to consider
Consider all of your options before taking on any kind of debt consolidation offer. Decide on the best course of action for your circumstances and talk to an experienced advisor like those here at Harrington Brooks.
The Annual Percentage Rate (APR) should be your guide when deciding which option is best. When taking out a loan, the number of repayments you'll have to make and the exact date of payment will be clearly stated in your loan agreement. From this information, the annual rate of interest over the period of the loan can be calculated exactly and by law, must be shown on advertisements. All other costs must be clearly outlined so you can be certain that the APR quoted is a safe and sure way to compare loan quotations. The one with the lowest APR is often the best value and should cost you less money overall.