Is a debt consolidation loan ever a good idea?

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.

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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 hestiate 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.

Make sure your home insurance has you covered

We’re not going to pretend otherwise – home insurance can be pretty boring.

But it is important to get it right. It could be extremely damaging financially if you had to make a claim, only to find out that your policy wasn’t valid and in fact, you weren’t insured at all.

Here are a few common issues that can crop up with home insurance. Make sure you don’t fall foul of any of these.

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Being underinsured…

You may think that being underinsured isn’t a huge problem. For instance, you may have told your insurer that your contents are worth £20,000, but in fact, it is worth £30,000. In this scenario, should you want to make a claim for the whole lot, you might just think that the insurer would pay you the £20k and you would just have to accept missing out on £10k.

But actually it could be worse than that – your insurer could refuse to pay you altogether or pay you a reduced amount, on the basis that you mislead them or didn’t give the full information, in order that you could get away with paying a cheaper premium.

Don’t fall into this trap. Go from room to room and price up everything as accurately as you possibly can. It is probably better to be slightly over-insured than under-insured, although of course, this would result in you paying more for your premium than you need to.

Going away and leaving the home vacant…

Each insurer usually has a period of time stipulated within their terms, dictating for how long you can leave your property unoccupied. Usually, this is around 30-days, which is more than sufficient to account for most people’s annual holiday. But if you are going away for longer than this and you need to make a claim when you get back (for instance if your home were broken into) then you could be in for a nasty surprise.

Also, some insurer’s allowable unoccupied periods are shorter than 30 days – so you should always double-check before you leave.

Renting out a room…

Renting out a room or taking in a lodger is not especially unusual in this day and age and can be a good way for you to make a little extra income on the side. Indeed – HMRC allows the first £7,500 of any rent your earn to be claimed tax-free.

But rather than leaving you quids in, this could actually turn out to cost you money – if you don’t inform your home insurer that you are renting out the room. An additional person living in your house, especially someone who is not necessarily a family member or well known to the property owner, could change the insurer’s view of the level of risk you present to them, and thus, invalidate your policy.

Carrying out building work and not informing your insurer…

This is probably something that is not widely known – but if you are undertaking any building work, even relatively small works, you should let your insurer know. If you don’t and you need to make a claim during the time the works are being carried out, you may find out you aren’t covered.

Deceiving the insurer…

It is unlikely that any rational person would seek to deliberately mislead or pull the wool over their insurer’s eyes, but you could find that you have accidentally done just that. When you apply for your insurance, chances are you answered questions about the sort of lock you have on your door, the burglar alarm you have at your property, etc. etc.

If these details are not actually accurate, then your insurer could decide that you were attempting to deceive them and lie about these pertinent details and invalidate your policy.

Take pre-emptive action…

So with all of this talk of taking action to make sure any claim you make is valid and paid, the best thing, of course, is if you don’t have to make a claim in the first place!

You should ensure that you keep on top of essential maintenance tasks around the home that will help reduce the chances of having to make a claim.

If you have an open fire, ensure you get your chimney swept regularly. Clear out your gutters and replace or repair any that are dripping, check roof tiles or slates for any that are cracked or damaged and replace these. Get your boiler serviced annually, and insulate any outside pipes to ensure that they won’t freeze and break.

These tasks are all relatively easy to do and relatively inexpensive, particularly compared to the cost of having to pay the excess on your home insurance and the increased premiums that may occur as a result of making a claim against your policy.