How does debt consolidation work?
Debt consolidation works by taking out credit to pay back your existing unsecured debts. You’ll then repay the new debt instead of paying towards your other previous arrangements. This can make it easier to keep track of your repayments.
They aren’t suited to all situations because it can mean extra charges and other interest costs. And if you’re already struggling with unmanageable levels of unsecured debt, taking on extra credit might make your situation worse.
We’ll take you through how they work and the different types of debt consolidation loans that are available. By reading this, you should be able to understand the process of debt consolidation and the costs included.
Applying for a debt consolidation loan
There are several different types of debt consolidation but they all mean taking out new credit to clear your existing debt. So, you won’t continue to repay the debts you had previously – the debt consolidation is designed to cover this.
Debt consolidation usually involves getting a new loan. If you owe money to a lot of different places, it can make things a less confusing. This is because it means you can pay off all your debts in one place and it’s easier to make sure you don’t miss anything. However, this will only benefit you if you don’t take out any extra credit.
You could also look at using debt consolidation to reduce your monthly repayments so they’re more affordable for you. Just be aware that if you do this, it might mean you end up paying back your debts over a longer period which can mean you pay back more in total.
Some debt consolidation loans mean you can repay your debts at a lower interest rate. It’s important you check the full costs of this kind of borrowing as extra fees can mean you end up paying back more than your original contractual agreements.
Debt consolidation is available both as an unsecured loan and a secured loan. Secured loans might be more likely to offer you better interest rates but they also require you to release some equity from your home. It’s important that you ensure that you can keep up with repayments of a secured debt consolidation loan, or you could be at risk of losing your home.
Balance transfer for debt consolidation
A balance transfer credit card is another way to consolidate your debts into one place. This is where you transfer your existing credit and store card commitments onto a new card.
You can get 0% interest-free balance transfer deals but you’ll probably need a good credit rating to qualify for these. And when you transfer any balance onto the card, there’s usually a fee. If you’re considering doing this, it’s worth working out whether the fees you’ll pay will outweigh any savings you might make in interest rates.
Are you looking to find out if you could get a debt consolidation loan? Read our page on ‘How do I qualify for debt consolidation?’ to see if it’s suitable for your situation.Continue to the next section How do I qualify for debt consolidation?