In the current climate, many people are struggling to pay off several large debts, with some barely affording to meet the minimum payments. The danger with this is that the minimum payment barely covers the monthly interest on a debt, meaning the actual balance only goes down by one or two pounds a month.
Of course, this means that it takes years to pay off the balance and a huge sum of interest is paid over the term.
Debt consolidation is often a good solution for such people: a debt consolidation loan is used to pay off all existing debts and features a single, affordable monthly repayment. Below is a quick guide to the different types of debt consolidation:
- Unsecured Personal Loan: These are available over various terms (1-7 years) and at various rates of interest (usually much less than the interest charged on credit and store cards). No security is required but an exemplary credit record is needed; lending criteria has been tightened as a result of the credit crunch.
Various amounts can be borrowed, usually from £1,000-£25,000, and with each payment made the balance decreases. If you use this method of borrowing to pay off debts you must be disciplined and make sure you do not run debts up again (it would be a good idea to cut up store cards/credit cards).
- A Secured Loan: these types of loan are secured on a property (thus they are only suitable for homeowners) and are a possible option for those homeowners with less-than-perfect credit histories, the self-employed, those who wish to borrow large amounts (up to £50,000 or more), and those who require a longer repayment period (up to 25 years).
Be aware that this debt is secured on your property and your home may be repossessed if you do not keep up with repayments.
Used responsibly, these two types of debt consolidation loan can save you thousands in interest and can improve your credit rating (providing payments are adhered to).
If you wish to take out a loan, check out an online comparison site such as uSwitch to find the best deals and rates. Obviously, you will need to have an adequate regular income in the form of employment to take out a loan.
Louise Bond, personal finance manager at uSwitch.com comments:
“As we embark on what is expected to be one of the toughest years in the history of the UK, it is vital that borrowers give themselves the best possible chance of servicing their debt in the most economical and manageable way possible.
If consumers are careful about managing their spending, a debt consolidation loan can help to reduce monthly repayments and it can also help to settle borrowings earlier, as repayments are fixed and set for an agreed number of years.
Borrowers need to be aware that taking out a loan or credit cards to consolidate debts must be approached in a disciplined way and should not be treated as a quick-fix solution to debt problems.
Those who consolidate their debt into a single loan should only borrow enough to cover all their debts and no more, and all existing debts must be closed down immediately. The purpose of a consolidation loan is to reduce debts – consumers should not be tempted to fall into the trap of racking up these debts again as they could end up finding themselves in a vicious debt cycle.”
If you have debts and lose your job, you need to take action fast. Visit a debt advice agency such as the Citizens’ Advice Bureau and they will be able to advise you accordingly. They will work out a debt management plan for you and negotiate with any creditors on your behalf. Repayments will be based on your ability to pay and any interest will be frozen, meaning a big weight off your mind. Payments for people with limited income can be as little as £1 a month.
If you are struggling with debt, whether you are in employment or not, seek the advice of a debt counselling agency (such as National Debtline) as soon as possible.