Making the Debt Consolidation Decision

The principle behind a debt consolidation loan is simple: to bring together two or more of your debts into one new loan and therefore only one interest rate that will reduce your current monthly outgoings.

With Britons carrying a combined debt of over ?1 trillion, debt consolidation loans are big business in the UK today and generally there are three main types. The first is to borrow a sum of money to pay off all your other debts using an unsecured personal loan; this means that your home would not be at risk if you failed to meet the repayments.

The second kind is asking your existing mortgage lender to release any equity you may have in your property, then using this extra money to pay off any other loans, credit cards or HP agreements that you may have. This is effectively just increasing your mortgage so comes with the same risks as your original agreement regarding repossession if you can’t keep up-to-date with the repayments on the mortgage.

The third and final type is similar to the above but involves getting a secured loan on your property from another lender i.e. not your current mortgage provider. As the loan is secured, your home would again be at risk, and if the worst was to happen then the second lender would have an interest in your home once the mortgage lender’s interest had been dealt with. This is often commonly referred to as a ‘second charge’.

So what are the main advantages of going down the debt consolidation route? Well firstly, it usually means you’ll reap the benefits of a lower interest rate. HP agreements, store cards and some credit cards charge varying double-figure interest rates each, so by consolidating all these into a personal loan, you could effectively reduce this rate by quite a considerable amount.

With the lower interest rate comes a reduced monthly repayment which in turn frees up more money for other outgoings that you may have been struggling to meet, such as heating bills or council tax payments. In order to get the best possible reduction on your monthly payments it definitely pays to shop around for the lowest interest rate; never go with the first offer that you read about as it may not be right for your circumstances.

Finally, if you pay off all your existing debts and consolidate them with one personal loan then you only have one company to deal with as you go forward. It can be confusing and stressful to try and juggle different lenders, amounts and payment dates if you’ve got more than a few, so not only will you reduce your monthly payments this way, you’ll also make life a little bit easier for yourself.

As with most major financial decisions, it is worthwhile considering and evaluating all the options and types of personal loans open to you before making up your mind and signing any paperwork.

Daniel Collins writes on a number of topics on behalf of a digital marketing agency and a variety of clients. As such, this article is to be considered a professional piece with business interests in mind.