Debt consolidation is where you combine all of your existing debts into one single balance.
This is done by taking out a debt consolidation loan, which pays off all the other debts leaving just one monthly repayment.
Merging debts with this method means that you pay one, often lower, monthly repayment. This is instead of making multiple repayments.
It can be helpful if you are struggling to manage multiple repayments at once.
However, it can mean you end up paying more in interest overall. Therefore, it is important to carefully consider your options before starting your plans.
Types of debt consolidation loans
There are many types of debt consolidation loans available; including both secured and unsecured options.
A secured loan uses your property as security. This means that if monthly repayments aren’t met, your property is at risk of being repossessed by the lender.
With this option, you are normally thought to be a lower financial risk. This can result in reduced interest rates and higher loan amounts. However, this may depend on other factors relating to your situation.
Another method that can be used to consolidate debts is unsecured loans, which do not take a property as security.
Instead, lenders check your credit score and other affordability factors to decide whether to lend to you or not.
Both types have risks, so you should always make sure you assess your situation before making any plans.
Is it a suitable option?
Consolidating debts can be helpful as it means you'll only need to make one monthly repayment.
This makes budgeting easier and reduces the risk of missing payments. This can positively affect your credit score. To find out more about the impact it may have on your credit score, read our blog will debt consolidation hurt my credit score.
Additionally, by researching well, you might find a consolidation loan with a lower interest rate than your current debts. This can be beneficial and may help you save money in the long-run.
If you're eager to find out how you might accomplish this, our blog on 'how to consolidate debt' may help you.
Risks of debt consolidation loans
While they can be helpful, there are risks you should be aware of. Taking out a loan may lead to extra fees, causing you to borrow more than your current debt.
As a result, you might end up with a larger overall debt, putting you in a worse financial situation.
Additionally, if the new loan has a longer repayment term, you could end up paying more in total due to increased interest costs.
Make sure to carefully consider all aspects beforehand to avoid issues.
Conclusion
Consolidating debts can be handy, as only having one repayment can be easier to manage and track. However, there are risks involved. You should always carefully assess your options. Additionally, you could also seek professional help from a financial advisor if you are unsure of the best course of action.
Alternatively, if you are having financial problems and are struggling to make payments to your creditors, it may be possible to make arrangements with them. You could do this directly or through a debt charity. For extra support, you could also contact MoneyHelper or Citizens Advice Bureau (CAB) who offer free advice.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
