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How Does Debt Consolidation Work?

If you have outstanding balances across a number of cards, then the idea of consolidating them into a single monthly payment can seem like a good one. However, it’s worth doing the maths before you make any decision! Interest rates on debt consolidation loans can be high, and you may end up paying back more than you would have done if you’d continued with your credit card repayments. Before you take out a consolidation loan, it’s important you carefully consider:  

Debt consolidation is a big decision and we recommend you speak to a financial adviser before going ahead with such a solution. In this guide we will provide information on all your options if you are considering a debt consolidation loan.

What is debt consolidation?

Debt consolidation means taking on a new loan that is then used to clear all your existing debts. However, this doesn’t mean the debt is gone, it simply removes the stress of dealing with multiple lenders and you only owe one lender money each month.

It’s very important that you carefully consider how the interest rate on this new loan will affect your ability to make repayments. This is particularly true if you have consolidated a large amount of debt. For example, a larger loan with a basic interest rate could mean you pay more over time than two smaller amounts with lower interest. Some people discover that their repayments can lower in cost if they consolidate with a 0% or low interest loan but this will usually only last for a limited amount of time of the repayment plan.  

What debts can be included in debt consolidation?

Debts that can be included in a consolidation loan include:

  • Credit cards – Many people discover that interest on credit cards increases over time, leading to problem debt when the minimum repayments they can afford barely cover the extra charges. Here are our top tips for consolidating credit card debt in 2019.
  • Store cards – Store cards usually offer lots of enticing interest free plans, but if you have not paid off these in time then you’ll discover the interest rate is incredibly high, making it difficult to get out of debt.
  • Personal loans – Whether it’s a bank loan or a payday loan, interest rates and charges can catch people out leading to large amounts of debt that appear impossible to pay off.


When might you consider a debt consolidation loan?

For many, a debt consolidation loan is only the preferable choice if the cost of repayments each month are lower than your other loan repayment combined, or the amount owed does not increase. It’s important to remember that there are numerous other debt solutions to also take into consideration before making a decision, such as an IVA, which also moves debts into one agreed single monthly repayment and can even remove the interest paid altogether. 

One of the biggest problems with debt consolidation loans is that they do nothing to change the behaviours that got you into debt in the first place. If you even think you might be tempted to use your cards again after paying them off, or if you’re using debt consolidation as an easy out (to avoid really looking at your budget), you may benefit from debt help and advice – find out the options available to you online now.

When making repayments on a debt consolidation loan, you should refrain from taking on further credit to ensure you can focus on clearing the only debt you now have. It’s important to carefully check the new interest rate and to work out whether this improves your financial situation in the long run.

While a consolidation loan offers ease when it comes to making repayments, it may push up the interest rate due to a larger amount of money being owed on one product. This could result in you paying back more in the long run, which isn’t preferable when trying to clear outstanding debts.

Are there any debt consolidation alternatives?

Debt consolidation should also only be sought out if you no longer require extra credit and can live comfortably while making the new repayments. However, another debt solution may be preferable and should not be counted out. A DMP (Debt Management Plan) or an IVA (Individual Voluntary Arrangement) are potential alternative options. They can result in you paying a set monthly amount and not having to worry about multiple repayments to various lenders.

Before taking on debt consolidation, we recommend you speak to an impartial financial advisor. However, if you would now like further information or advice on the other debt solutions, such as IVAs and DMPs as mentioned above, then our in house financial advisors are on hand – get in touch and get free financial advice and support.

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