What is debt consolidation and how does it work?

July 17, 2022

Debt consolidation is the process of rolling multiple debts into one singular debt allowing you to pay your debt off in singular monthly payments instead of multiple.

The two primary methods of debt consolidation are via credit card or a personal loan.

Transferring multiple debts onto one credit card allows you to pay your debt off in one place and at one interest rate. This prevents you from having to keep track of different payments and different levels of interest.

Taking out a personal loan is another way of consolidating your debt, as you can use the loan to pat off your multiple debts and pay back the loan in instalments over a period set by the loaners.

Debt consolidation won’t reduce your existing debt, but it can make it less expensive to pay off. Low-interest rates on loans or credit cards mean you will pay less interest, reducing the overall amount you will eventually pay off.

There are many benefits to debt consolidation, and it may be a good option for you if:

– You have many high-interest loans and wish to combine them all into one, lower-interest loan.

– You wish to improve or protect your credit score by minimising the risk of missing payments due to having multiple payment dates.

– You wish to explore options that could potentially reduce your monthly debt repayments.

– It can help you pay off your debt faster, as you will be paying more than just minimum monthly payments on your credit cards.

– Debt consolidation loans are often fixed, meaning you will have an exact date when you will be debt-free. This can make managing your debt easier as you know when it will be paid off and how long it will take to do so.

However good a solution debt consolidation may seem, it is important to explore the negatives before deciding on taking out a loan or combining your debt:

– If you take out a large repayment loan, or have a lot of debt to begin with, you may pay more over time. Whilst debt consolidation typically comes with lower interest, you may find you don’t qualify for these options and therefore pay more overall.

– There could be hidden fees involved in transferring your balance or other fees. Be sure you are able to cover these costs as you don’t want to end up in more debt for trying to organise yourself.

– Missed payments on a personal loan can cause more issues. Your credit score could suffer as a result which may cause your interest rate to increase or incur late fees. Ensure you plan and budget appropriately to ensure you make your monthly payments on time.

Debt consolidation is not a magic fix, but it can improve the way you manage your debt. If you feel you are a good fit for debt consolidation and have the means to make monthly payments on time and are prepared to front any hidden costs and fees, it may be a great decision to secure financial stability in your future.

Need advice on mortgage debt consolidation? Get in touch with us today!

Your home may be repossessed if you do not keep up with your mortgage repayments.

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