So your debt management plan (DMP) has been ticking over nicely. Hopefully your...
To debt consolidate or not to debt consolidate?
Do these sound familiar?
‘Clear all your debts today with one easy monthly payment’
‘Fast pay out, whatever your credit history’
‘We like to say yes’
‘Apply online now for a quick decision’
These are just some of the tempting offers that we see daily on adverts for debt consolidation. Doesn’t it look so easy to consolidate your debts into one easy payment?
But should you consolidate your debts? What are the pros and the cons?
People often ask us for debt consolidation advice. We don’t tend to recommend it as we think that consolidation is rarely the best option for dealing with debts.
Why is debt consolidation unlikely to be the best solution?
Your property could be at risk
Lenders often offer a consolidation loan on the proviso that it’s secured against a property. This increases the chance that you’ll be successful in getting a consolidation loan because it limits the lender’s risk.
However, this would also mean that your house is put at risk if you’re unable to keep on track with your payments on the loan.
Your access to credit might already be maxed out
Often people that are looking for consolidation loans have already maxed out their current borrowing facilities.
This can mean that access to further credit is limited – or only available at very expensive rates. This MoneySavingExpert.com article gives more information on how a credit file works and how to improve it.
The interest payments may be higher than they seem
Although the monthly repayments to a debt consolidation loan can be more manageable, you’re actually repaying more in total through interest payments.
Is taking out more credit really the right thing to do?
Consolidation loans can be seen as a debt ‘solution’. Although as this, by definition, means taking out more credit, this doesn’t make sense!
If your problems have come about through depending on credit to get by, this might not be the right way for you to deal with your debt in the long term.
There’s too much temptation to use more credit
You might tell yourself it’s okay to continue to put things on credit, using old credit cards, on the basis that your debt consolidation loan will take care of it. This can escalate the problem very quickly and just make the amount you owe build up.
If this is right for you, what do you need to think about before going ahead?
In some instances, a consolidation loan can be a viable option. If you are thinking about taking one out, you should consider your situation first.
When people ask us for debt consolidation advice, we recommend they do the following:
Stick to a budget
Put together an effective and realistic budget. Don’t forget to put aside for costs that aren’t monthly, such as your car MOT or visits to the dentist.
Use an online budget planner to help you or get in touch with us.
Borrow a reasonable amount
Don’t over-commit and borrow more than you can afford. Use your budget to help you work out how much surplus money you have.
Check if there are cheaper ways to move your money around
Is there an option of a 0% balance transfer instead? If it’s the interest that’s unmanageable, switching to a credit card with no interest could be a better option (but remember to cut up and close the account on the old card).
Check what you’ve applied for
Ensure that you’re applying for a debt consolidation loan and not a fee-charging debt management plan. These are two very different things, and a DMP could mean defaults, CCJs and further interest and charges which would be recorded on your credit file. Keeping up to date with a consolidation loan won’t affect your credit rating.
Find a Credit Union
Consider your options with your local Credit Union. They aren’t just for savings; they can sometimes provide low interest rates on loans too.
We recently produced a guide to debt consolidation – take a look on the StepChange website.