Being in a large amount of debt can be stressful and make it difficult to move forward with your life. Managing your finances when you have debt can be even harder, even if you make cuts in your monthly outgoings.
Often, the things that keep us in large and seemingly unmanageable amounts of debt are the interests rates rather than the debt itself. You may be paying a monthly payment towards your debt and feel as if the balance of your loan or credit card is barely reducing, even if you’re paying more than the minimum monthly payment. If you have several debts with different credit card companies or banks, the interest rates and charges can be even greater.
If you’ve heard about debt consolidation but are unsure whether it’s a good idea for you, then there are a few things you should consider. Please remember, should you need assistance with your debt, don’t hesitate to contact one of the six UK debt charities that can offer you free advice and support. You can find a list of these at Growing Power.
Do you have several different debts?
If you have debts from multiple lenders then managing them all can be a challenge. Ensuring that you don’t miss the monthly payments and budgeting for each of them can quickly become tiresome. Consolidating your debt into one monthly payment can simplify the process and enable you to manage your finances better.
Multiple debts usually come with monthly payments on different dates which can be hard to budget for, with a consolidation loan you’ll know exactly when the payment will come out and will be able to agree to this date beforehand.
How much debt are you in?
You should consider how much debt you’re in before taking out a large loan to consolidate debts. Often, consolidation loans will have a minimum amount that you’ll be able to borrow. So, if you have £2,000 worth of debt and the consolidation loan that you’re looking at will only allow you to borrow a minimum of £4,000 then you’ll be doubling the debt you’re in. Avoid borrowing more than you need as this will essentially be additional debt.
How much are your monthly payments taking off of your debt?
If you can only afford to pay the monthly payment each month to each of your debts, look at your statements are see how much of that is paying off money that you have borrowed and how much of it is being eaten up by interest. It can depend on the amount that you owe and the interest rate that you are currently being charged at, but often you’ll find that the minimum payment mainly covers the interest and only takes a very small amount off of the actual debt.
If you find that this is the case and you’re doing the same thing with multiple lenders, then a consolidation loan may be a good idea. Look at the terms of the loan and compare them to that of the debts that you already have, calculate which option will allow you to pay off your debt in the shortest amount of time with the money that you have.
Are you willing to commit to a fixed-term?
You must remember that once you have committed to a loan you will be committed to making the repayments each month until the term of the loan ends. Depending on the amount of debt that you have, this can be up to around 8-10 years. You’ll need to be sure that you can make the agreed loan repayments for the duration of the loan, your existing debts may not have an end date to them, which can offer more flexibility depending on your circumstances.
What is the interest rate on the loan?
Before agreeing to a consolidation loan, be sure to thoroughly familiarise yourself with the terms and conditions that surround it and compare the interest rate of the loan to that of your current debts. If the interest rate on the loan is higher than your existing debts then you’ll need to decide whether this is worth committing to make your debt management simpler.
Sometimes it can be easier to choose a loan at a higher rate that enables you to consolidate your existing debts if you know that you’ll be financially able to make the repayments for the duration of the loan.
Are you considering borrowing from additional lenders?
If you’re looking at consolidating your debts, you should make sure that you avoid getting into further debt with lenders. It can be tempting after you have paid the balance of your credit cards and overdrafts with a consolidation loan to borrow from these lenders again. You should make every effort to avoid this however as you don’t want to be paying a loan repayment and generate new monthly repayments from your old creditors. Therefore, it’s a good idea to close accounts once you have cleared the balance or request for your credit limit to be lowered if closing the account isn’t possible.