Debt consolidation is where you move some, or all, of your existing debt from multiple accounts into one standalone account. This helps you manage your borrowing and reduce costs.
This is a situation you may be in if you have run up credit card debts at high rates of interest – or extended your overdraft too many times.
A debt consolidation loan allows you to take out one loan to pay off multiple debts – like credit cards – and reduce total monthly payments.
By paying off outstanding debts, you could potentially close your old accounts with the credit from the new one. You will still have a debt, but instead of owing multiple creditors, it will all be in one place.
You will borrow enough money to pay off your current debts and owe the money to just one lender. This cuts your spending and can put you back on track with your finances.
There are four main loan types available to help combat your debt and create a clearer picture of your finances:
Unsecured personal loans are the most common high street option. However, if you have a low credit score, they are much more difficult to acquire. It could harm your rating with a hard search for an application if you aren’t eligible.
Payday loans are an option that provides quick approval and finance. However, they also come with extremely high APR. This could lead to you having to repay considerably high amounts of interest.
Secured loans use some sort of valuable asset as collateral. The main issue is that you could lose the asset – such as a house – if you don’t keep up with repayments. So it is not an option taken to be lightly.
Guarantor loans are a common option for those with poor credit ratings. This loan secures you the money, but a guarantor will make repayments if you can’t. It is a loan system built on the trust of those you know.
If you choose to consolidate your debt with a guarantor loan, it can result in various benefits for you.
A major advantage of consolidating is that it simplifies your budgeting. Instead of wading through statements and balancing multiple payments, you’ll have one monthly repayment on a set date.
Having your debt in one account can be easier – by allowing you to see how much you owe, how soon you could pay it off, and the interest you’re being charged.
You could also reduce the amount of interest you’re paying each month by consolidating your debt under a single loan.
However, consolidating debt means you could pay back a larger amount over a longer period of time. If you extend your loan term, you may be charged more interest overall.
There are two main ways a debt consolidation loan could help to improve your credit rating and financial future.
By shifting your debts into one account and simplifying your budgeting and payments, debt consolidation can help you make full repayments on time. Over time, this responsible financial behaviour should improve your score.
A debt consolidation loan can potentially help you pay less interest. This puts you in a stronger position to make larger payments each month. It will allow you to pay off your debt quicker, potentially improving your score.
As a potential guarantor, there are certain factors you should consider before committing to a decision.
Debt consolidation can involve large sums of money. So, ask yourself whether the borrower is likely to manage the repayments. Otherwise, the burden could fall upon you.
It is also important to see if you are in a position to afford to repayments on the loan if they can’t – and if doing so would affect your relationship.