What is Debt Consolidation?
The amount of debt owed throughout the UK is slowly increasing, reaching £1,633 billion last February and resulting in an increase of £942.39 per person compared to the previous year. This sharp increase has become a tremendous cause for concern in recent times, with the Office for Budget Responsibility predicting household debt to reach a staggering £2.425 trillion by 2023/2024.
To say the least, debt has become a major issue throughout the UK, and is very often caused by many different contributing factors. One of the main reasons for this debt problem amongst so many people is the lack of knowledge borrowers have when it comes to many of their loans. By not educating borrowers fully on their loans and what is expected of them throughout the duration of their loan, many UK borrowers are finding themselves stuck in a sea of misunderstanding and miscommunication, not knowing how to resurface.
It is therefore vital to ensure proper education for borrowers on all potential loans they may apply for, be it a mortgage, payday loan, or otherwise. This could lead to prospective borrowers making more informed decisions about their loan applications, resulting in fewer taking out loans they cannot afford in the first place, further reducing debt throughout the UK, which in itself will prove beneficial to the wider economy of the country.
When it comes to juggling and managing numerous debts, loans and financial commitments all at once, debt consolidation loans and solutions are certainly something to consider, including second mortgages for the purposes of debt consolidation where appropriate. But, what do you need to know when it comes to consolidating your debts and finances and how can it work?
What Does it Mean to Consolidate Debt?
Debt consolidation is the process by which a borrower takes all of their outstanding debts in the form of financial commitments and merge them into a single, consolidated loan. A debt consolidation loan can make paying back your debts altogether more manageable, helping borrowers to lessen monthly outgoings and subsequently leading to much improved money management.
However, such loans can only help to make paying back any existing debts more manageable when borrowers can afford their repayments. You can use a debt consolidation loan to pay off existing debts such as:
1. Store Cards
2. Personal Loans
3. Credit Cards
What is the Best Way to Consolidate Your Debts?
Debt consolidation loans come in two forms: secured and unsecured loans. Unsecured loans will mean that acceptance of the loan required is based on your credit score and history. Therefore, when applying for this loan it is best to check your credit score to find out if you are eligible. If you discover that your credit rating can in fact be improved, it may be worth undertaking some remedial actions to do so if possible, prior to applying for the necessary loan.
Those with bad credit however, may want to look down alternative routes of paying off their debts.
A loan for debt consolidation purposes that is secured will mean that the debt is held against one of your assets, usually your home or a property you own. It is crucial that borrowers in such cases are confident in their full and timely repayment of a secured loan, much like in the case of a first or second charge mortgage, as failure in doing so may result in repossession of your home or other high value asset that the loan has been secured against and security for the lender.
A debt consolidation loan could also help to improve your credit rating. Once repayments start to be made, some lenders may start to see that a borrower is improving the way their finances are managed.
When merging all of your existing debts into one debt consolidation loan, it is vital to check whether any of these existing loans have early repayment charges. If this is the case, these early repayment charges must be factored into calculations for repayment of the debt consolidation loan.
What Are the Downsides of Debt Consolidation?
Debt consolidation loans can be very beneficial to people in certain situations; however, they are not always the best fit for everyone and all circumstances. It is important to fully understand the exact terms, conditions and details of your financial situation and how well this will fit in with a debt consolidation loan’s schedule of repayment.
Although merging all of your existing debt commitments into a single, larger, often more affordable and manageable loan may seem a no-brainer for some, it is important to be aware of the disadvantages such a loan may bring:
Potential increase in interest rate of loans – A longer loan could mean paying back a larger amount in interest than previously owed (although the loan capital will remain largely the same)
Charges for early repayment – Although there are disadvantages to consider, these are all circumstantial. Therefore, it is always best to discuss each potential loan in depth with a financial adviser as well as your lender or broker to make sure you know exactly what to expect and prepare for. Some loans do not allow for early repayment without early repayment charges and you will need to check whether or not these apply and should they be pertinent, you will need to assess whether the loan is altogether worthwhile
Other Things to Consider
Potential borrowers should also consider the fact that merging all of your existing loans into one does not minimise your debt, rather it makes them more manageable. Hence, temptation to start racking up additional debts must be avoided at all costs, as this is very much negative credit and financial behaviour.
Debt consolidation loans are, by their very nature designed to help borrowers work their way through excessive amounts of debt; they by no means reduce any debts through this merging of various debt sources and obligations.
Although these types of loans can be useful for some borrowers, they may not be the right fit for everyone. Therefore, when looking for ways to better manage your existing debts, consider alternative routes that may help you to come out of debt sooner. Being aware of the different options out there can help a potential borrower to pick the best loan for their current financial situation.