So what is Debt consolidation?
Debt consolidation is bringing together all your debts under one umbrella to a new financial product such as a credit card or a loan in a bid to save on interest payments from your various debt obligations. You will usually then have to make one monthly repayment to cover this new debt rather than lots of payments for each debt you owe.
Debt consolidation might not always reduce the total interest you have to pay but may rather make your onthly payments more affordable by spreading your debt repayment over a longer period.
What is a debt consolidation loan?
A debt consolidation loan is a loan which allows you to combine all your outstanding debt commitments🛵🚘📱💳💸💰(credit cards, loans, car finance loans) under one loan with a fixed or variable interest rate. ⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀
This usually offers you a cheaper monthly payment than all your other debt commitments added together and it also means you have one payment per month rather than multiple.
In some cases, debt consolidation loans might take longer to pay off as they are over a longer period of time. Due to this, they could potentially cost you more in interest although the lower monthly repayments will be affordable.📈 A debt consolidation loan could be a personal loan, a secured loan or a P2P loan.👫
The main reason people consider debt consolidation is that they will essentially be paying off the same debt but at a lower interest rate.🤹♂️ ⠀
Is debt consolidation a good idea?🌝
Debt consolidation loans might end up costing you more🌧🌥🌫 (even with a lower interest rate) if you choose to have the debt paid off over a longer term. This is because you pay interest for a longer period of time.
Some debt consolidation loans are secured against property(such as your car🚐🏰 or home). This means if you default on your debt consolidation loans you might end up losing your property. ⠀⠀⠀
So how do you get a debt consolidation loan?😑🏦
The process📋 isn’t so straightforward and requires you to do a bit of work. You will have to call all your lenders to get settlement figures for your current loans(debts) and any charges(fees such as early repayment fees) for moving over your debt or settling your account.😣😣 ⠀⠀
You then have to get a debt consolidation loan offer online and see if it is cheaper to move your debt. Then you accept the offer and pay off your current debts with the new loan. You then begin to make monthly repayments to the debt consolidation lender.✂️ ⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀
OR you simply move over to the debt section of your Huuti dashboard💡💡 to see if you are eligible for a debt consolidation loan, how much you will save and what to do next🗒
There are two types of debt consolidation loans
This is when the debt consolidation loan is secured on an asset, this could be a car or your house for example. If it was your house, it will need to be mortgage free or if there is a mortgage you will need permission from your mortgage lender to have a 2nd charge placed against the home. In some cases your lender will allow you to consolidate your debts into your mortgage but this is likely to cost you more in total repayments than other options. If you fail to keep up your repayments, the lender can then repossess your assets and sell this to recoup the loan. Secured loans usually have better rates due to their less risky nature.
This is when the lender gives you a debt consolidation loan based on your credit file. There is no asset to back the loan and these loans are usually more expensive due to their higher interest rates. If you miss a repayment on this loan this could severely damage your credit score just as with secured (debt consolidation)loans.
What you should consider when looking for a debt consolidation loan
Early repayment & other fees:
Different lenders might all have charges associated with transferring your debt elsewhere. You should ensure you have an idea of what these charges are and estimate if you can afford them. You should also consider them when taking into consideration the savings you could generate from consolidating your debts.
Some debt consolidation loans also require you to pay some fees when you take out a new debt consolidation loan, you should take this into consideration too. A good financial wellbeing platform will take all this into account when giving you options to consolidate your debt.
The interest rate being charged should provide you value as its total interest cost to you should be cheaper than the total interest charged on all your current debts combined. If this isn’t the case then you should reconsider a debt consolidation loan.
Your repayment term:
A shorter repayment term can be a good idea but may still cost you just as much in interest as your previous loans combined and a longer term will usually cost you more as you pay interest on the debt over a longer period of time. You should consider this before settling on a debt consolidation loan.
The point of a debt consolidation is to make savings. Getting a debt consolidation loan with a monthly repayment which you can’t afford is only going to put you in a worse financial situation. You should avoid doing this as a missed repayment on your credit file could seriously damper your chances.
Debt consolidation loans aren’t the only cliche financial product in this space to help you save interest on your debt and repay them. You can simply get a personalised loan or a balance transfer credit card(even for 0% for a promotional period).
Getting in debt is bad, we know! A good financial wellbeing platform will do well to avoid you getting in debt by making sure your spending isn’t over the roof and highlighting areas you should monitor carefully. And if you are already in debt, they will assist you in finding the best product to reduce your total costs and spend on interest rates.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.