Credit is a convenient way of buying goods you need now, then paying for them over a period of time. However, according to a recent report by The Money Charity, the average UK household has nearly £8,000 in consumer credit debt – from a combination of things such as personal loans, credit and store cards and overdrafts.
If you’re managing multiple lines of credit, it can be challenging to stay on top of repayment dates and interest rates. So, one option is to consider consolidating your debts into a single loan.
We take a look at the ins and outs of debt consolidation.
'Taking out a loan to sort out your debts might sound counterintuitive - yet it could end up saving you money.'
What is debt consolidation?
Debt consolidation is using one loan to pay off all your outstanding debts - such as personal loans, overdrafts, store cards and credit cards. This can help you regain control of your personal finances, particularly if you’re accruing interest on multiple loans or finding it hard to manage several monthly repayments.
How can taking out a new loan help you pay off existing debts?
By consolidating all your debts into a single loan, you’ll have a clearer view of your finances. This makes it easier to organise your monthly budget, structure repayments, know how much interest you’re paying and work towards a goal of becoming debt free.
Not only is one single monthly repayment easier to manage, it also means it’s less likely you’ll miss an instalment which can lead to late fees, thereby increasing the amount you end up owing.
Taking out a loan to sort out your debts might sound counterintuitive - yet it could end up saving you money.
Considering debt consolidation?
First, make a list of all your outstanding debts. Then calculate how much you would need to borrow to pay them all off – make sure you refer to the terms of the loan and include any interest owing, early exit fees or other charges.
It also helps to know how much the total repayments for all your loans would be, if you continued as you are. This way you can make sure you choose a loan provider that won’t just help you consolidate your debts but also save you money in the long run.
Choosing a financial provider
It’s important to choose a reputable financial provider that meets your needs – so make sure you do your research in advance.
Things to consider:
- What monthly repayments can you afford? Be honest: it’s vital to choose a loan that works for your circumstances.
- Interest rates (APR). How do they compare to your current rates? Are these fixed or variable? Ideally, you’ll be looking for a fixed interest rate that’s lower than your current providers’.
- Term of the loan and total amount owing. How does the length of the loan affect the total amount you end up paying? If you can afford it, would you be better off paying more every month for a shorter term? It might help to use a debt consolidation calculator.
- Fees and charges. Are there fees for setting up the loan, or early exit fees if you’re able to pay it off sooner than anticipated? Include these in your calculations.
- Missed payment charges. Although you want to avoid this, if you do miss a repayment, what are the late fees and how will this affect what you owe?
Debt consolidation loan options
Some financial institutions offer debt consolidation loans, to help you get your finances back on track. Other options include: personal loans, overdrafts and balance transfers low or interest-free credit cards – an option if you only have credit card debt. These are all known as unsecured loans and tend to cover amounts from £1,000-£25,000.
If you need to borrow more money, you might want to consider a secured loan – where the amount you owe is ‘secured’ against things you own, such as your house or car. It is important to remember however that, although they often have lower interest rates than unsecured loans, if you don’t meet your repayments you might end up losing your possessions.
Managing monthly repayments
If you’re consolidating your debts, there are two important rules to follow:
- Make sure you meet your monthly repayments. Getting charged late fees and accruing additional interest will mean you owe more money in the long run.
- Make a repayment plan and stick to it. Don’t be tempted to use the loan for something else, and try not to borrow any more money in the interim.
Consolidating your debts can be an effective way to regain control of your finances. With multiple loan providers on the market, it’s important to choose the one that best meets your needs. And with a bit of advance planning, you could end up not just clearing your debts but maybe even saving some money in the process.
TSB debt consolidation loans offer 3.5%APR Representative, on loans between £7,500 to £25,000, for 1 to 5 years.
Lending is subject to status. You must be 18 or older and a UK resident.