Put very simply, debt consolidation involves taking out a loan with which to pay off all your other debts.  So, in effect, you replace mutliple regular payments with just one.  Seems easy, yes?  Perhaps debt consolidation is the best solution for your current situation but it is vital that you take many things into account before going ahead.  According to leading UK charity, Consumer Credit Counselling Service, taking out consolidation loans to pay off debts can have disastrous consequences for the over-indebted.  When you think about it, borrowing to get out of debt can’t be a good idea because you’ll just end up owing more. 

Reasons for Considering Debt Consolidation

Everybody’s circumstances are, of course, very different.  Here are some reasons why you might want to consider debt consolidation:

• You are finding it difficult to keep up to date with existing debt repayments
• You are having problems affording day-to-day expenses
• Your existing debts have high interest rates and you would like to lock your debts into one, lower rate.
• You want to reduce your regular payments to a new lower amount

Advantages and Disadvantages of Debt Consolidation

Advantages

• Debt consolidation can reduce your monthly debt repayments High interest rates are replaced with a lower rate.
• Debt consolidation will allow you to combine multiple debts into a single one
• Your creditors will go away – satisfied to have been paid
• You will have just one creditor to keep  happy

Disadvantages

• Debt consolidation payments can go on for many years
• Interest rates can be very high – you must check out the total amount you will repay over the period of the loan
• If the loan is a secured one, your house (or whatever you have used as security) will be at risk if you do not keep up the repayments
• You will be in debt for longer than if you paid off your debts individually .
• The contracts for debt consolidation loans are very prescriptive and  you will incur a financial penalty if you lengthen or shorten the period of the loan
• A secured loan will be linked to the Bank fo England interest rate – so your repayments will increase as interest rates increas.  The reverse is, of course, also true.

Debt Consolidation Regulation

Secured Loans

Companies offering secured loans that are based on releasing the equity on your home via a remortgage must be registered with the Financial Services Authority, which makes it compulsory for them to provide you with certain information.

Loans that are not mortgages are not regulated in the same way.  The loan company you use must have a Consumer Credit Licence issued by the Office of Fair Trading. This imposes certain conditions on them which require them not to mislead you.

Unsecured Loans

It is rare to be offered an unsecured loan for amounts above £25,000.  Once again, the Office of Fair Trading are responsible for regulating companies offering unsecured loans.

Choosing a Consolidation Loan

Apart from shopping around for the best terms you can find, you should take the following points into consideration:

The first step in bringing your finances under control is to make a list of all your debts. The list should include all companies owed money to (creditors), and the exact amount owed (found on your most recent correspondence/statement).

If any creditors have started legal action, these need to be dealt with as a matter of urgency. If you are unsure how to proceed with this, your local Citizens’ Advice Bureau will be able to assist you.

When you gave finished compiling your list of creditors, you need to sort out the debts into priority and non-priority. Priority debts include:

• Mortgage/rent: if you do not pay any arrears, you may lose your home

• Utilities (gas/electricity/water): if these are not brought up to date, your supply may be cut off

• Council Tax: Although you cannot be imprisoned for council tax arrears in Scotland, the debt can be enforced in other ways – for example, your bank account or salary may be accessed, or your personal possessions seized.

• Fines: You can be sent to prison for non-payment of fines.

• Maintenance: again, you can be sent to prison for failing to keep up with maintenance payments.

• Loans secured on your property: your home could be repossessed if payments are not kept up to date.

• Car loan: if you cannot do without your car, for example if you live in a rural area or are disabled, then your car loan needs to be classed as a priority debt.

• TV Licence: it is a criminal offence to be without a TV licence.

Other, non-priority debts include credit cards, catalogues, unsecured loans, overdrafts, and any hire purchase agreements. These are referred to as ‘non-priority because you cannot be sent to prison for non-payment, but you still need to acknowledge these debts and work out a suitable repayment plan – otherwise, your creditors may take you to court.

The next thing to do is work out a weekly/monthly household budget. Firstly, all money coming into the home needs to be listed, including wages, any benefits, maintenance, and any monies from non dependants. Outgoings then need to be listed, including rent/mortgage, utilities, council tax, food, leisure activities, TV licence, telephone, travel expenses, clothing, and insurance – in short, everything you pay out.

Any money you have left over at the end of the month/week can be used to pay off your debts. You may also be able to generate extra income by claiming benefits you are entitled to, or take on a second job – if you have a spare room, why not rent it out? Any extra money you can put towards your debts means they will be paid off quicker.

If you have trouble drawing up a budget, your local Citizens’ Advice Bureau can assist you – there is also a handy budget sheet to print off on their website.

With priority debts, you need to get in touch with your creditors as soon as possible, explaining your financial situation. It is usually best to write to them, keeping a copy of any letters you send for your records – the Citizens’ advice has a handy section on their website that offers tips on negotiating with creditors.

You need to make an offer of payment to each creditor in order to clear arrears, based on your disposable income (send them a copy of your budgeting sheet).

It is pretty much the same with non-priority debts – if you have any spare money from your budget after negotiating your priority debts, this can go to paying off your non-urgent debt.

Cathie Campbell, Money Advice Manager for Citizens Advice Scotland, says:

“Often people leave problems to last minute, so our key message is to urge them to get in touch with us as early as possible when there is a problem with repayments (such as notice of losing job, an illness affecting future work prospects, or other change in circumstance) and before creditors take any summary action against them.  It’s easier to negotiate and set up a realistic payment plan this way.

Also, the local authorities are becoming more active in taking court action for non payment of council tax, especially against householders with property.

We don’t as a rule class car loans as priority debt, but each individual’s circumstances are taken into account, as outlined above”.

With both priority and non-priority debt, you can negotiate with creditors yourself, or seek the help of the Citizens’ Advice Bureau or debt management company (be careful here, as some do charge a fee for their service, while others, such as Payplan, do not).

Creditors often do accept offers of fair payment, but usually agree to this for a limited period only; say, 6-12 months. After this time, they will want to know whether your situation has improved and you can pay more. However, creditors are not obliged to accept offers of payment and may take legal action against you.

If you do not have enough money to pay anything off your non-priority debts, there are a number of options open to you, ask creditors to wipe off the debt or apply for bankruptcy, especially if you are on a very low income and have no assets – see the Citizens’ Advice website for further details.

Peter McGahan, Managing Director of Worldwide Financial Planning, advises:

“Ensure you pay off debts that have the highest interest rate first. Also, remember to pay bills that are secured to your property; if you default for long enough they will potentially repossess your house. A personal loan is less important, for example, as the loan isn’t secured on the property.

Make sure your interest is calculated at least monthly so the debt is reduced accordingly. Some banks calculate interest yearly so any payments are not really taken into account until the year end.

Also, if you have money in some form of investment or savings which is earning you 2% interest but have debt that you are being charged 9% on, it’s quite clear that the debt is costing you a lot more than what your savings are earning, so consider repaying that debt”.

Some debts, such as store cards, hire purchase and credit cards carry high interest rates, and if you are paying off several debts at high rates, a debt consolidation loan may offer a solution to this.

In simple terms, a debt consolidation loan is used to clear all your debts and you pay this loan off with one manageable monthly repayment. There are many advantages to a debt consolidation loan, such as:

• Owing one debtor rather than severa.

• Many people manage their debts by making the minimum payments, meaning the total owed will take years to clear. With a debt consolidation loan, you can see the balance owing going down each month.

• You may be able to get a loan at a competitive interest rate, saving hundreds (if not thousands) of pounds in the long-term.

• Choice of loan term means you can tailor payments according to your financial circumstances (although bear in mind that if you pay over many years, the total interest charged will be substantially higher than if you paid over a shorter term).

• Providing you maintain payments, a debt consolidation loan can drastically improve your credit rating. Whilst this is a good thing in certain circumstances, such as applying for a mortgage, it is imperative that you resist the urge to take out further credit.

One of the problems associated with obtaining a debt consolidation loan is choosing the right provider: typing ‘debt consolidation’ into a UK internet search engine displays 227,000 results! There are literally thousands of finance companies offering such loans, and it is important to make the right choice. Here are some tips to ensure you choose wisely:

• Some debt consolidation loans are secured, which means that the debt is secured to a homeowner’s property and, if the homeowner defaults on the loan, the property may be seized. While this type of loan may be the only option available to homeowners with poor credit histories, there are often other options available to those with good credit histories, such as personal bank loans or other unsecured loans.

• Pay attention to interest rates, as these can vary widely (seen below). The figures show the repayment of a £15,000 loan over 5 years, with the first column showing the monthly amount payable, and the last column shows the total amount payable – there is a staggering £4490.43 difference in the total amount payable on interest rates of 7.90% and 18.90% respectively.

If you do not feel that a debt consolidation loan is right for you or you cannot obtain further credit, there are other options available:

• An Individual Voluntary Arrangement (IVA) is a formal arrangement between a borrower and their creditors, whereby a set proportion of the total debt owed is paid to each lender. After 5 years, the debts are usually classed as settled, with any remaining debt written off.

To be eligible for an IVA, you must have unsecured debts of at least £12,000 and be able to afford to pay a minimum of £180 per month off this.

• The government are introducing Debt Relief Orders in April 2009, and these allow those on low incomes to rid themselves of debt which they have no possible means of repaying. To qualify, people must have under £15,000 of unsecured debt, no more than £50 per month disposable income and assets of less than £300.

If you are struggling with debt, always seek the help of a specialist agency such as the Consumer Credit Counselling Service (CCCS) or the Citizens’ Advice Bureau. These will be able to offer you free advice regarding the best way to solve your debt problems.

Unsecured debt consolidation loans don’t need security or collateral. And tough competition means that unsecured loans aren’t as expensive as they used to be. Like many other financial products, unsecured debt consolidation companies almost all offer free quotes based on your specific circumstances.

Unsecured debt consolidation – what’s the deal?

• Both tenants and homeowners can apply for unsecured debt consolidation loans

• Most providers set an upper limit to the amount borrowed, often £25,000, on unsecured debt consolidation loans

• To reflect the risk of losing their money, lender interest rates usually depend on the personal financial circumstances of the borrower. Someone with a good credit rating, a full time permanent job and an income of £30,000 a year will probably qualify for a lower interest rate on their loan than someone with a part time job earning £8,000 a year

• Many loans come with no application costs or upfront fees and you can usually apply for an unsecured loan even with a low credit rating, defaulted loans, County Court Judgements and mortgage arrears
• If you are self-employed, you will probably be able to qualify for unsecured debt consolidation
• Many loan providers promise to pay your money within a few days of your application being approved

Unsecured debt consolidation companies

• Money Extra
• Debt Consolidation Loans
• Best 4 Loans

Research to find the best unsecured debt consolidation deal

As with all important financial decisions, it makes sense to explore all your options rather than making a snap decision that you might regret. There are many ways to pay off your debts and an unsecured debt consolidation loan is just one of them.

Please let us know of any other alternatives to a unsecured debt consolidation loans.

Debt consolidation is often used to manage out of control debt. You might have four or five store cards, three maxed-out credit cards, a bank loan, an overdraft, and the total monthly repayments can be huge. Consolidating debt means that you take out one large loan to pay off all your debts in one go. This leaves you with one single monthly repayment instead of several separate payments.
You can choose to pay your loan off within a timescale that suits you – one year, two years, five years, ten years and so on. This can shrink your new monthly repayment, sometimes as low as 60% less than the original debts. The interest rate on your new loan might be lower than your original loans, which can also lower your repayments.

The advantages of debt consolidation

•    Balancing the books and budgeting household expenses is a challenge, especially with today’s galloping inflation and threats of more interest rate rises (June 2008). If your monthly debt repayments are out of control, consolidating debt might provide the solution.
•    Being in debt is stressful, especially when your creditors are starting to hassle you. Consolidating debt means you only owe one creditor, not handfuls. So your stress levels are reduced.
•    If you aren’t paying off your debts in full every month, you might be paying the penalty with high finance rates. Creditors can charge anywhere between six and twenty one percent on the balance if you only pay off the interest on your credit card.
•    If you have an interest free loan and miss the pay off deadline, they’ll probably slap on enormous interest charges until you pay it off in full. Sometimes the charges are backdated to the start of the loan, which can be really painful! A debt consolidation loan neutralises these nasty interest rates.
•    Debt consolidation loans let you extend the time you take to pay the loan off. A six month loan can be rolled into a debt consolidating loan, and paid off over a year or two instead with lower repayments.
•    One payment, once a month, and all your debts are paid off in one go. With debt consolidation there’s less administration, less of your time wasted and less risk of losing track of your repayments in future.

Find out more about debt consolidation

•    Debt24.com
•    DebtConsolidation.co.uk
•    MoneyExpert.com