If you have several different debts, a number of store cards for example, one option is to bring them all together so you only make one payment at a lower rate of interest.
This is called consolidating your debt. If you’re considering it, you need to make sure consolidation is a truly cost effective way forward for you. In this piece we’ll look at what to think about and the different ways you can do it.
Debt consolidation loans
There are lots of companies that will offer to lend you enough money to pay off all your debts even if you have a bad credit rating. You then only have one payment to make each month. But you should tread very carefully when considering this option, remember these are commercial companies so there will be a cost to using them.
You may be required to pay fees for their service and even if they offer you a better interest rate, that results in lower monthly repayments, you may be asked to sign up for a longer term. This could result in a higher overall cost.
There are two types of consolidation load, unsecured and secured.
- An unsecured loan is not secured against an asset such as a home and may be more costly because of this.
- A secured loan is secured against an asset such as a home, this may make them cheaper or more accessible for people with bad debt. But you could lose your home if you do not keep up repayments.
Should you take out a debt consolidation loan?
As we’ve mentioned you need to think very carefully before going down this route. Before you make any decisions, it’s a good idea to talk to a free debt advisor.
A consolidation loan may be right for you if you are sure you can keep up with the repayments and it will give you the opportunity to cut your spending and improve your financial situation. You will need to weigh up the overall cost of the loan including fees, with the current cost of your debt.
Make sure you examine the terms of any loan closely. For example, is the cost fixed or could it go up if the Bank of England raises interest rates. If it does, could you afford higher repayments? You should never take out a debt consolidation loan if you cannot afford the repayments, if the loan doesn’t clear all your debts or if it is significantly more expensive in the long run.
If you think you are likely to continue creating debt or if you can’t get on top of your spending, it is much better to address these issues first.
Balance transfer credit cards
Taking out a consolidation loan isn’t the only way to bring your debts together. There are other options that may be better.
For example, if you have credit or store card debt you may be able to transfer the total amount you owe to one card with a cheaper interest rate. This is called a balance transfer.
Often you will be given an introductory offer of 0% interest which sometimes lasts for more than two years. There may be a fee to pay, especially if you have a poor credit rating, but this can save you £1,000s in interest repayments.
Pay off as much of the debt as you can during the interest free period and remember to transfer again when that period is over and your repayments rise rapidly.
Remortgage to release equity
If you own enough of your home without a mortgage, it could be worth releasing some of that value to pay off your debts. This involves increasing the amount you are borrowing by remortgaging.
This is often attractive because mortgages usually come with much better interest rates than other forms of debt. But that doesn’t always make it the right thing to do and there are a few pitfalls to be careful of, for example:
- Mortgage terms are usually very long, often up to 30 years. That means even though you are paying a lower interest rate, you could end up paying back more overall.
- You will usually have to pay a fee to remortgage and if you are leaving another mortgage within the initial deal period you may have to pay an early repayment charge, which can amount to thousands of pounds.
- Borrowing more will increase your mortgage repayments so make sure you can afford them. If you miss repayments you could lose your home.
Other solutions to consider
There are lots of other ways you can deal with debt, that do not involve consolidation. Debt charities can help you decide which is right for you. They are likely to suggest a range of options including:
- Debt management plans, which enable you to make regular payments to your creditors that you can afford and will eventually pay off the full amount you owe.
- Debt relief orders, which allow you to stop paying debts under £20,000 if you do not own a home, and wipes them off after a year.
- Individual voluntary agreements, this a form of insolvency for larger debts that allows you to pay what you can afford before writing the remaining amount off after a certain period of time.
Each one of the above may impact your credit rating which will make it harder to borrow money in future. So make sure you are aware of all the consequences before committing to one.
Working with us
Another way to solve your debt problems is to sell your home and pay them off with the money you make. We can help you do this by buying your property quickly. In fact, we can have the money in your account in just seven days if necessary.
Because we only buy from our own cash funds, there are no estate agents’ fees to pay and you are not part of an unpredictable chain that could fall through. What’s more we instruct and pay for solicitors.
If you’d like to discuss how we can help you we’d be happy to chat, so please get in touch.