Debt Consolidation: What You Need to Know
Managing debts can be challenging (not to mention a little confusing, particularly if you’re handling more than one liability). If this scenario sounds familiar, debt consolidation – the process of merging debts into one loan – might be a viable option for you.
Consolidating debts involves taking out new credit; essentially, you’re settling old debts with a new loan, which you’ll then need to pay back over time. This, of course, has implications that should be fully considered – so it’s important to weigh up all the pros and cons before moving forward. In this guide, we’ll provide a brief overview of the debt consolidation process.
Why Should I Consider Debt Consolidation?
Though you may be unfamiliar with the term, debt consolidation is now a fairly common process. As time passes, it’s easy to accumulate different debts with different lenders, due to the myriad credit options that are available (from overdrafts to store cards, there are many possibilities when it comes to financing). Keeping track of what is owed, to which institution, can become a headache: with different repayment amounts required at varying intervals, and different interest rates to keep on top of. It’s also challenging to set priorities if you’re struggling to make the full payments for each separate credit agreement: do you prioritise debts with higher interest rates, or the smaller debts?
Debt consolidation can help to ease the whole process by:
Reducing your monthly payments;
Reducing or simplifying the amount of interest you pay; and
Limiting the number of organisations to whom you owe money.
Bear in mind that debt consolidation is different to debt management. Debt management is the name given to the process by which you (or a debt management specialist) negotiate a payment plan with the relevant lenders.
Will a Debt Consolidation Loan Affect my Credit Score?
A strong track record of making payments on time can improve your credit score – so if taking out a debt consolidation loan makes the process easier for you, it could positively impact your credit rating. However, if the overall cost of the new loan means that you struggle to keep up with repayments, this will be recorded in your credit history.
Is Debt Consolidation the Best Option for Me?
Whilst debt consolidation is a great option for some people, it isn’t the only – or best – solution for everyone. We’d advise reviewing the terms carefully and assessing the financial implications against your monthly expenses/income to ensure that, in the long term, it’s manageable for you. Bear in mind, too, that you don’t need to take out a debt consolidation loan to fully clear your debts – it might be enough to just reduce your current repayments substantially.
Nonetheless, you’ll want to consider:
Not only the interest rate and monthly repayments, but also the term of the new loan. Compare this carefully to your existing loans and debts. Under your new credit agreement, will you be making substantial payments for a longer period than is stipulated by your current loans?
If you do wish to spread the payments over a longer term, you may end up paying more overall. Is this viable for you? If you’ll save on interest (and fees) during the term, this may be worth it – but it’s important to assess whether the benefits outweigh any extra long-term costs.
Finally, are you eligible for the most affordable loan? There are various factors that can have an impact (such as your credit score). We recommend seeking expert advice before you apply. Cherry Godfrey’s Personal Loans team are on hand to provide guidance and support when you need it most.
If you’d like to discuss your current situation and find a debt consolidation solution that is specifically tailored to your needs, please submit a callback request today for a free no obligation quote. One of our team will be happy to contact you at a convenient time to go through the options.