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Debt Consolidation

What is Debt Consolidation?

Debt Consolidation is the process involved in taking out a loan to pay off other outstanding debts. This is usually done to secure a lower interest rate and have just one monthly payment each month instead of lots of various payments on debts with varying interest rates.

For example, assume you owe £12,000 on a credit card at 18% APR, £2,000 on a store card at 26% APR and £6.000 on a car loan at 12% APR. By obtaining an unsecured loan for £20,000 at a rate of 7% APR you can pay off all these debts and then have one single loan at a lower interest rate and with a lower monthly payment. Providing you can keep up with the repayments, this is a good way to restructure your debt.

A debt consolidation loan might be a good idea if you're not really struggling with your debts as such, but maybe want to get on top of them more quickly and be more organised with them. If you want a good rate on your loan, your credit rating will most likely need to be in good stead. If are struggling or you are insolvent, then a Debt Consolidation loan would not be a suitable solution for your debts.

Debt consolidation loans can be an unsecured debt but there are also loans that can be secured against an asset such as your home. In this type of loan the interest rate can be quite low, as the risk to the lender is reduced. Failure to keep up with repayments on this type of loan could result in the lender taking action against you for the asset that the loan is secured against.

Another type of loan that is available on the market today is a guarantor loan. This is a loan that is usually available to people with low credit scores who cannot get a loan in their own name, so a second person (the guarantor) such as a family member or a partner, is involved that bears responsibility of the loan. Should you miss any payments, the guarantor will be responsible for the debt. Interest is also generally quite high on these types of loans, so you will be repaying a lot more than what you actually borrow.

Payday loans are another type of loan. They are an expensive, risky and very short term solution. They are designed to tide you over until payday if you are short on cash, but they must be repaid in full on time and in a short period of time, with interest and charges. These type of loans carry very high interest rates also. If you miss payments on payday loans it wont be long before the outstanding debt spirals. These types of loans have been under much scrutiny over the years and are now subject to strict rules and regulations in what they can charge in fees and interest.

We do not offer Debt Consolidation Loans here at IVA.net, but we are happy to advise you on your debts and what options you have available.

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Debt Consolidation

Debt Consolidation is when you reorganise your debts by obtaining a loan to pay off some or all of your other debts.

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Debt Consolidation Frequently asked questions

Find out everything you need to know about a Debt Consolidation by reading our Debt Consolidation questions and answers below. If you have a question that isn't covered here, be sure to get in touch with us and we'll be happy to answer any queries you may have.

Debt consolidation provides a way for you to manage any debts that you may have. If you have multiple debts than it can be rather time consuming to manage all of these and you may find that you miss payments. This is where debt consolidation can work as it allows you to merge these into one so that you only must make one payment a month instead of several. It could also help to make your payments more manageable since you could find a better rate of interest with a different lender. In many cases these new loans will be secured to property via a re-mortgage.

Debt consolidation can be useful to help clear debts on either credit or store cards or for overdrafts.

Advantages

You could find a loan that has a much lower interest rate which could help save you money and make your payments more manageable. Tackling your debts can help to relieve stress and make you feel more in control of your problems. It can also be helpful to have just one creditor instead of several and means you are less likely to miss a payment due to an oversight.

Disadvantages

You may be charged to settle early on the loans that you already have. Depending on the type of loan you take out you may have to pay commission and fees, for example, if you consolidate your debts by taking out a re-mortgage.

Alternatives to a debt consolidation loan

Debt consolidation is not suitable for everyone so you may like to explore the other options available to you. You could look at entering an Individual Voluntary Arrangement (IVA) which is essentially a legal agreement between you and your creditors to repay the debts that you have.

A Debt Management Plan will help you to come to an agreement with your creditors to repay what you can afford, and you will make a monthly repayment to the Debt Management Company who will oversee the plan. Bankruptcy is another option but is generally considered as a last resort. With this your debts will be written off after a short period, however your assets will be sold to pay the debts and you may face losing your home.

There are a number of things that you should consider before applying for a debt consolidation loan. Whilst you are reducing your repayments and thus your overall debt, you are still borrowing money and must be sure you can afford the repayments.

You must still look to change the habits that got you into debt in the first place, whether overspending, over borrowing, or lack of discipline. If you fail to do this, you could result in a similar situation and then next time you come to look at your finances you will find a loan is no longer an option and you will have to look to more radical debt management alternatives such as an IVA or bankruptcy.

Debt consolidation loan rates vary. Be sure to use a comparison service that compares the rates of different lenders to make sure you get the best Annual Percentage Rate (APR) available.

If you do not have a good credit rating, it may be possible that you get a poor rate of interest, or you are declined the loan and have to look into other options such as an IVA, debt management plan or even bankruptcy.

Even if you are accepted for the loan, it may be that on further reading you decide that one of the aforementioned debt management services suit you better. This would be the case if you were worried about keeping your loan repayments or if the level of your debt was not even manageable with a loan.

How secure is your job? In today's economic climate, no ones job is as secure as it used to be. Make sure that you know the options you have available should you be made redundant or become unable to work. You can also consider employment insurance to account for this.

We always suggest that a debt consolidation loan is best for people that are certain they will be able to pay back their debts within a realistic period of time, but maybe not necessarily on the original terms. If your debt problem has become severe then an IVA or bankruptcy might be a better option. If you are unsure or need more clarity, you can get some advice from our team should you wish.

A debt consolidation loan can help make your payments more manageable, by putting them into one loan. If you have found that you have too many bills all over the place this might make life a lot easier for you. Most people that find a debt consolidation loan to be effective are those that have a number of credit cards with high annual percentage rates and want to reorganise their debts more efficiently.

A secured debt consolidation can put an important asset, such as your home, at risk if you don’t make your payments so be aware of this as well.

We always suggest that you pay off as many of the debts that you can with the loan that you obtain. Some people get debt consolidation loans just to put off paying the money they owe and this ends up costing them more in the long term.

To recap, A Consolidation loan could:

  • Make it easier to manage your debt
  • Lower over all interest rates
  • Reduce the time frame that you have your debts fully repaid
  • End up costing more in the long term, depending on Interest Rates
  • Put your assets at risk if it is a secured loan and you cannot keep up with repayments

When you get a secured loan / remortgage you will end up taking out a new mortgage that is big enough to pay off your unsecured debts and your mortgage. This means you’ll end up only having one payment to make each month. An Unsecured loan has nothing to do with your mortgage and you will just be borrowing enough to pay off your unsecured debts.

Please be aware that by increasing the term of your repayment, you will typically be increasing the amount that you end up paying each month as well. It’s always best to pay off your debt as quickly as possible.

Another disadvantage is that you could put your home at risk if you fail to make your repayments. Keep this in mind when looking into secured loans / remortgages. You should also take into account the fees that could be involved, for example, legal fees, arrangement fees, charges for early repayment, exit fees, and mortgage valuation costs.

  • Debt consolidation can give you a reduced interest rate and lower monthly repayments and in some cases, reduce the duration of repaying your debts.
  • Debts are merged into one to try and simplify your finances and give you just one creditor. Just make sure you take out the loan or remortgage through a reputable lender.
  • This also means you should be able to avoid late payments.
  • Helps to lower stress levels by reorganising your finances.
  • If you decide to remortgage then you face the risk of losing your home if you fail to keep up the repayments. Therefore it is not always the risk free option that some people may think it is.
  • By consolidating your debts you may actually be increasing the total amount you repay if you only pay it back slowly. You will also be likely to have a set amount to repay rather then being able to pay just the minimum on a credit card.
  • If you do decide to take this route then you may find that your debts have already damaged your credit rating and you may not be able to obtain a loan. Also remember that the interest rates could be higher so you have to make sure you can afford the repayments.
  • You will need willpower to make this work since you will have effectively cleared your credit cards. It is important that you close the accounts you have cleared. You do not want to get yourself into further debts by spending on them once you have cleared the balances.

The issue with a debt consolidation loan is that you will need a certain good level of credit rating in order to get a worthwile loan deal and interest rate. Loans are offered to people with a poorer credit rating but the deal being offered may not be better than the method you are currently using to repay your debts. You can check your credit rating free online but there are more variables taken into account than this, with the most important one being affordability.

Debt consolidation loan rates will vary from lender to lender and will largely depend on your credit rating and financial health. Obviously, if your credit rating is not up to scratch, you will represent more of a risk to lenders and that will be reflected in the Annual Percentage Rate (APR) on your loan.

Typical interest rates

Debt consolidation rates will vary depending on the lender that you use but they can almost always lower your monthly debt repayment. One of the reasons for this is that you can spread the payments over a greater period of time.

If you are dealing with any reputable loan provider then they should be able to lower your interest rates significantly. Sometimes certain credit cards can carry as high an interest rate as 19% so there should be no problem in finding a debt consolidation loan that can save you money.

You could end up spending more than your original debts would have been if your loan were over a much longer period of time. This is because your payments are lower but the length of the loan is longer so the total amount of interest paid over that time is higher.

If you’re getting a debt consolidation loan you still want to pay it off as quickly as you can. It’s never advisable to be paying interest on anything that is not maintaining or increasing its value.

Another pitfall of a debt consolidation loan is that people feel that they can keep spending with their credit cards once the greater sum of the debt has been put on this loan. This is obviously not a very sound financial decision and if this type of thing tempts you, you may need to seek help regarding your spending problem.

This greatly depends on the amount of your debts and how much you can repay. There are other solutions available for dealing with your debt, so if you are struggling at all with repayments it is worth talking to a debt advisor and exploring all options.

No. You can still get an unsecured loan even if you don’t own property or if you don’t want to borrow against such assets. If you choose that path you may pay higher interest rates than with that of a secured loan.

Yes, but only for the debts that you clear. If you still have outstanding payments on other debts that you do not clear with the loan, then you are likely to get pursured for those debts.

This depends on the terms and conditions of your loan. If the lender allows it, you can contribute extra, but some lenders may not allow this and it could carry penalties. If your lender allows it is recommended that you try to pay it back as soon as you can. Even a small extra amount will save you money in the long run.

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