Consolidating debts
Consolidating debts
Consolidating debt is when you take out a single, new loan to pay off several existing debts. This can be a good way of taking control of your finances but you need to be careful. A consolidation loan may not always be your best option.
Before considering a consolidation
loan
Before you decide on a consolidation loan, find out what's on offer and what
alternatives you've got. These could include:
trying to make new arrangements with your existing lenders
checking that you're making the best use of credit options you've already got -
such as an overdraft facility, credit or store cards, a personal loan or
extension to your mortgage
borrowing from relatives
You could also take advantage of the free advice that's available from debt
counselling services such as National Debtline. (See 'Where to get help and
advice' below.)
If you do decide to take out a
consolidation loan, shop around for the best terms from a reputable lender.
Building societies and banks may be able to offer you a personal loan.
Reasons to consider a consolidation loan
Used carefully, a consolidation loan can help to put you back in control of your
finances. The advantages can include:
you can use it to pay off your priority debts (for more about priority debts,
see the link 'Which debts to pay off first' below)
you could pay a lower rate of interest – interest rates for borrowing money for
a short while are usually very high (consolidation loans are longer term and may
be better value than short-term borrowing)
your monthly payments might be lower
you know when you’ll finish paying off the debt
you’ll only have to make a single payment each month
you’ll only deal with one lender
you may avoid falling behind on payments and getting a bad credit rating
Possible disadvantages of consolidation loans
Remember that there are some drawbacks too, such as:
you could end up paying more overall and over a longer period
you’ll usually pay extra charges for setting up and repaying the new loan
if the loans you’re consolidating had the interest added at the start, you’ll be
paying interest on that interest - as well as on the amount you borrowed
all your eggs will be in one basket – if you get into difficulties, it may be
more difficult to come to a new arrangement with a single lender
if the loan is secured against your home your property will be at risk if you
can’t keep up payments
How to choose a consolidation loan
Always shop around for the best terms – it’ll save you money. Make sure you
understand all the terms and conditions of the loan, such as:
how long you’ll be making repayments and how much you’ll pay back altogether
the interest rate and whether it can change
what the monthly repayments are and what happens if you miss one
any penalties or costs you’ll have to pay if you want to repay it early
what happens if it’s secured on your home and you can’t keep up the repayments
Once you’ve arranged the loan, aim to keep your finances under tight control –
for example, cut up you credit cards and don’t let the debt build up again. Be
aware that the lender may put pressure on you to borrow more by extending the
loan.
You’ll be encouraged to take out loan
insurance with your loan. Make sure you’re
clear about the terms, that you really need it and that you’ll be able to claim
on it if you need to.
© Crown copyright 2005
The material featured on this page is subject to Crown copyright protection
unless otherwise indicated and has been provided by direct.gov.uk
Published November 2005
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