What is debt consolidation?
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