What is debt consolidation?
Debt consolidation is the term used when a is used to pay off all your other unsecured debts.
A debt consolidation loan can be taken out to pay debts such as credit cards and store cards, catalogues and personal loans. Taking out a debt consolidation loan means that you will only have to make one monthly payment rather than several monthly payments to cover your debts. This can make it easier for you to manage your finances and, in theory, makes keeping up with your payments simpler. However, debt consolidation is not the best solution for everyone. Taking out a debt consolidation loan could leave you in a worse financial situation than you are currently in. Please think carefully before taking out a debt consolidation loan and understand the advantages and disadvantages associated.
Is debt consolidation right for you?
Although debt consolidation can help some people, for others, it can create even bigger debt problems.
For many people, payments to a debt consolidation loan can work out more expensive such as higher interest rates. It is important to remember that if you have debt, or if you have missed payments on your debts, this will have affected your credit rating. You will find that the only way you can borrow more money is at a higher interest rate. If you need to borrow money at a higher interest rate you will pay more money over the term of the loan itself.
Bigger monthly payments and longer loans
You may have to make a large payment to your debt consolidation loan on a monthly basis, or you could find that you are paying the money back for a long period. If you’re applying for a loan you should always check how much the payments are each month, and how many payments you will need to make over the lifetime of the loan. This is very important.
Debt consolidation fees
Most debt consolidation loan companies charge fees and these will be added to the money you are borrowing, therefore increasing the amount and possibly the term of your loan. If you are thinking about taking out a debt consolidation loan it is very important that you understand all of these things, and please carefully check the terms and conditions.
Secured and unsecured debt consolidation
There are two types of debt consolidation loans – secured and unsecured.
Secured and unsecured loans have different consequences for your finances and it is very important that you understand the differences between the two loans.
A secured loan is when a debt is secured against your property. Taking out a secured loan is like taking out another mortgage. If you cannot pay the loan back, the loan company can sell your property. We would never recommend that you take out a secured loan to pay back your unsecured debts. A secured loan is usually cheaper than an unsecured loan, because lenders know that they can sell your assets if you do not pay the money back. As there is less risk to lenders, they are usually able to offer lower interest rates for secured loans. But a secured loan is much more risky for you. You never know how your circumstances might change in the future and you could be putting your home at risk with a secured loan.
An unsecured loan is also known as a personal loan. If you’re struggling with your finances and you can’t keep up with your repayments, your credit rating will be affected. However, your home is safe. In these circumstances, you would normally be able to reach an agreement with the lender for them to accept lower payments or refinance your loan over a longer period.
Can you afford a debt consolidation loan?
Taking out a debt consolidation loan is not the best solution for everyone.
If you do decide to take out a debt consolidation loan, you will only have one company to pay back each month rather than a number of creditors. However, you may be making large payments to that company every month and over a long period of time. If you’re struggling to pay the debts you have at the moment, you may not be able to afford the payments to a debt consolidation loan. Look at your income and expenditure to see what money you have available and make sure that you can comfortably afford the repayments. If you can’t afford the payments, you will end up struggling even more in the future. To find out what other options are available to you, get in touch with us today.
After a debt consolidation loan
If you do decide on a debt consolidation loan, make sure that you use it to pay off all your debt for good.
You are most likely considering a debt consolidation loan because you cannot afford to pay the monthly repayments on the debts you have now. If you decide to take out a debt consolidation loan, always pay your existing debts off in full. Cut up all your credit cards and cancel the agreement in writing, otherwise you might be tempted to borrow more. Be aware that if you do borrow more money after consolidating everything into one debt, you will have an even bigger debt problem than you began with.
If you are having difficulty paying back your debts, there may be a better solution for you than getting a debt consolidation loan.
Everyone’s circumstances are different, and what works for some people, won’t necessarily work best for you. We can help you to identify your best solution.
Debt management plan
Who is it for?
A debt management plan (DMP), is for those who have some money left over at the end of each month, but not enough to pay all their debts.
How does it work?
A debt management company will normally arrange a debt management plan for you.. The organisation arranging your DMP will draw up a proposal for your creditors, which asks them to accept reduced payments. They will also ask for interest and any charges to be stopped.
Other Debt Solutions
Individual voluntary arrangement
Who is it for?
An individual voluntary arrangement (IVA) is a legal process for those with unsecured debts of £15,000 or more.
How does it work?
An IVA is arranged by an insolvency practitioner. Your insolvency practitioner will help and advise you throughout the process. They will assess your finances and draw up a proposal for your creditors. With an IVA, your available income is used to make affordable monthly payments towards your debt over an agreed period of time – usually 60 months. You may also pay a lump sum towards your debts. At the end of the agreed period, your remaining debts are written off. There is a fee involved in organising the IVA, but this will be included in the payments you make. Creditors representing at least 75% of your total debt must vote in favour of the IVA for it to be able to go ahead. When your creditors agree to the IVA they are also agreeing to take no further legal action against you to recover the debt, providing you keep to the terms of the arrangement. Your insolvency practitioner will contact you once a year to review your finances. You and your creditors will receive annual progress reports and you will be notified when your IVA is complete.
Who is it for?
Bankruptcy is a legal procedure for people who cannot pay their debts when they are due. It’s a form of insolvency so to be eligible, your unsecured debts must outweigh your assets, including property and vehicles.
How does it work?
If you make yourself bankrupt, creditors write off your unsecured debts, meaning you have a fresh start. However, you will be subject to certain restrictions during the term of the bankruptcy, which is usually 12 months. In order to file for bankruptcy, you have to pay a fee of £700 (£175 to the court and £525 to the official receiver). If the bankruptcy is approved, creditors must stop charging interest and are prevented from contacting you or taking legal action to recover the debt. In some cases, you are asked to make monthly payments towards your debts from your available income. This is known as an Income Payment Arrangement, and can last for three years. Bankruptcy should not be taken lightly as it is a big step and you may have to give up your assets. You should always get expert advice before making the decision to go ahead with it.
How can we help?
We can provide you with free, confidential debt advice and find the best debt solution for your situation. We can advise you more on and find the best option for you.