Debt Consolidation

If you unable to pay off existing debt and find it difficult to organise repayments between creditors, debt consolidation may be the option for you.

Debt consolidation involves borrowing enough money to pay off all your existing debts. You then will only have one creditor and the monthly payments will usually be lower. However, because of this you will be paying off your debt for longer.

There a few things to be aware before taking out a consolidation loan:

Many credit companies will charge a fee for settling the debt earlier than planned. To make sure that you borrow enough money, agree a settlement amount with your creditor first.
Fill in an income and expenditure form, allowing extra money for emergencies. From this you will be able to see whether or not you are able to afford the consolidation loan repayments. If this proves that you would still be struggling with repayments, you should look into organising a debt management plan.

There a several different types of consolidation loan available so you will need to know which one is most suitable for you:

Some consolidation companies will issue a secured loan. Although the interest rates are lower on this kind loan, it will be secured against your property. If you are unable to keep up with your repayments, your property is in danger of being possessed. Never agree to a secure loan to pay off your current unsecured debts (such as credit card debt).
You may be able to obtain an unsecured consolidation loan. This would mean that your property is not in danger of being possessed if you are unable to keep up with repayments. However, the interest payments on an unsecured loan are generally higher to compensate this.
Finally, for a lower rate of interest, you may be able to re-mortgage your house to free up some the equity locked in it. The disadvantage of this is that you will probably be repaying the loan for the same time as your mortgage so you will actually end up paying more. Your property is also in danger of being possessed if you can not keep up with the payments.

It is worth shopping around to see what deals you can get from different companies. We've put together our Top Ten Debt Consolidation Companies to give you a start.

The Good and the Bad

Although consolidation loans can reduce monthly payments, you can actually end up paying off your debts over a longer period and there may be fees for organising a consolidation loan. Similarly, if the interest on your previous loans was all paid at the start, you may in effect be paying the interest twice - once on your old loan and again on your consolidation loan.

You may be offered a much lower rate of monthly repayment than the sum of existing credit card and personal loan repayments. This is usually because the period of the loan offered is much longer than the loans it is replacing. You will be paying a lot more interest over the longer period and there will usually be big penalty payments if you try to pay the loan off early. However, you may think that this is worth it if it means paying out less every month.

Whilst a consolidation loan can reduce the stress of having to juggle a number of creditors, it may be difficult to come to agreements with a single creditor. Be aware of the fact that if you have a secure loan, your property is in danger if you do not keep up with your repayments.