Those of us in the UK are statistically more in debt than we ever have been before – it gets worse year by year. Many of us have debts in many distinct locations and types in , varying from credit cards and overdrafts all the way through to mortgages on the property. It’s easy to see why that for many people in the UK, it’s very hard to maintain an accurate list of your debt in a comprehensive manner. That’s exactly where debt consolidation comes in.
What is it?
Debt consolidation is understandably a slightly nebulous phrase and it’s fair to say it has a few different specifics. At its core, however, it simply means that you take many separate payments and merge them into one. The biggest draw for consolidation is that it saves you a lot of time doing admin.
How can it work?
The more common method for debt consolidation is to work with a company to take out a single, larger loan. This is then used to immediately pay off your larger list of smaller debts, leaving you with one repayment left to take out. You can get the loan from a variety of locations such as a bank or a card company and each will have their own rates and stipulations.
It's an appropriate time to consider consolidation; regulation of the industry has meant that interest rates are exceptionally low, although it isn’t always guaranteed that you will end up paying less after your consolidation is done – it’s about the time saving, remember. There are further benefits available though, such as improvements to credit rating over time.
We’re all busy people, it’s fair to say! The time saving can be a very positive shift in your daily life, particularly if you feel stressed by multitasking and managing all the different conversations and individual payments.
You might find yourself with a larger monthly, quarterly or annual repayment amount. We’ve established that saving time is guaranteed (which is fantastic), but the amount you will find yourself paying after the consolidation is done will vary. You can consider the specifics in fine detail, such as by using a credit card to consolidate; this has the benefit of money savings through things like new user or ‘swap over’ deals on interest and the like.
A common downside that is easily avoided (that many still fall victim to!) is not using your new loan quickly to clear all the debts. Many find themselves suddenly interested in adding new debt to their lives with the lump sum they suddenly have! It’s irresponsible. If you look to consolidate, be clear about your goals and move like lightning to clear out all those payments immediately. You should have them all cleared on the same day you receive your new payment, ideally.
You may also see a short-term impact on your credit rating due to the new, larger loan. This isn’t a huge issue for most, as you will recover from this quickly, but it is a consideration to keep in mind.
You’ll also want to be aware of whether your loan is secured or not. Having the loan secured against an asset might give you a better rate of interest, but it can, of course, leave you vulnerable to losing a critical part of your life should you have difficulty in repayment; the balance of risk and reward is up to you – just be careful in your planning for it.
Ultimately, you will need to be on the ball when you do make the call to consolidate. If you aren’t confident of being able to clear your debts and manage your new repayment, it’s worth looking at your other savings options such as the ones that we cover on our blog.