When you’re juggling multiple debts it can be difficult to ensure that you meet the payment deadlines and don’t get into trouble with managing your other finances. Many people, for whatever reason, find themselves with more than one debt to manage and sometimes that can be challenging. If you’re looking for a way to simplify your finances, as well as reduce the amount of interest that you pay, then consolidating your unsecured debt could be the answer.
Debt consolidation loans – what are they?
The idea behind a debt consolidation loan is to take all your unsecured debts and consolidate them into one single debt. In practice, this means taking out a new loan that will cover the cost of all the other debts, using that to pay off those existing debts and then settling down to repay that new loan over time. In terms of simplifying your debts and giving you opportunities to make them more manageable, debt consolidation loans can be advantageous.
The benefits of consolidating your unsecured debt
Combine everything you owe into one single debt that you can monitor and manage much more easily. No more missed monthly payments or inconsistent interest rates – everything will be under one single agreement.
Cut the interest rates that you’re paying. If you have a range of different debts to combine then these may have a differing interest rates too, some higher than others. One of the major advantages of consolidating debt is that you may be able to cut costs with a debt consolidation loan that has a lower overall interest rate. The less you pay for your debt, the easier it will be to clear it more quickly.
Reduce your monthly payments. If you’re struggling to meet current debt repayments, a consolidation loan could provide the opportunity to restructure in a way that suits you better when it comes to repayment. Choose a slightly longer term for your consolidation loan and you’ll have lower monthly payments to deal with. This may mean that you’re repaying debt over a longer period of time – and so you may also pay more interest overall. However, it will put less pressure on monthly finances and may make it easier to ensure you stay on top of them.
Consolidating your unsecured debt – what to be aware of
Debt consolidation loans can help you to better manage existing debts, from personal loans and credit cards to overdrafts and store cards. However, it’s worth looking carefully at the terms you’re being offering to make sure they are really going to be beneficial. In particular look out for:
An interest rate that is higher than the one you’re already paying
Monthly repayments that are higher than required by your current debts (unless you’re looking to pay the debt off more quickly)
The opportunity to spend the consolidation loan without repaying the debt. If you don’t use the debt consolidation loan to repay those other debts then you will end up with double the debt as a result
Fees and charges that are applied by any of the lenders you’ll be repaying – what additional costs will there be to make early repayment?
How to arrange debt consolidation loans
Work out exactly how much you need. Don’t borrow more than you need but make sure you’ll have enough to clear all the older debts and close down the accounts so you’re not tempted to spend them again.
Decide what kind of terms you’re looking for. Are you seeking a lower interest rate than on current debts and do you want to pay less each month, for example.
Shop around for an attractive lender. Debt consolidation loans are widely available and, depending on your credit score and existing debts, you should have some appealing choices. Online loans brokers, high street banks and digital lenders are all good options.
Choose one or two lenders to apply to. It’s a good idea to avoid making too many applications in a short space of time, as this will affect your credit score. Choose one lender instead and wait to hear about the outcome of the application before you move on to another.
When you receive your loan repay all the other debts immediately. Don’t spend a penny of the new loan on anything other than repaying old debts.
Carry out some account maintenance. You’ll need to cancel old direct debits and set up new payments so that you can meet the terms of the new debt consolidation loan.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley