Even at the best of times when we are financially doing well, can afford to pay our bills, take a holiday, and live the life we want, we are still look at ways to save money.
It’s in our nature; why spend more than you have to.
If you are struggling with the bills and accounts, it seems to pus you even harder at finding ways to reduce your expenses, and try to get your finances back on-track.
A good start in either case, is to sit down, put pen to paper, and create a budget, listing all your bills, expenses, and all your income.
From this, and also tracking your spending each month, and creating a spending plan, is a great way to actually see where your money is going, and then deciding if you can reduce the expense.
You can also take the time to look at each of your reoccurring monthly expenses, such as car insurance, utilities, food, petrol, etc, and seeing what options you have to reduce these bills and save money.
In doing this, you also need to look at what debts you may have, loans, car finance, credit cards, catalogues, and any other monthly account you pay, and see if there is a way to reduce these monthly payments.
Obviously the best way to reduce any debts/accounts is to pay them off in full.
This can be much easier said than done.
However, by setting up a budget, and reducing some of your monthly bills, you may free-up some cash each month to pay extra towards an account, paying it off sooner, and saving you interest.
If you have multiple accounts, such as credit cards, loans, etc, by concentrating on paying off one account first, then applying that monthly payment to another account, increasing the amount paid each month, which will pay that account off early, you are creating a money snowball rolling down a hill.
As the payments/snowball rolls downward, it gets larger, until you have just one (1) account left to pay, and you are applying all the money you were paying on multiple accounts to just the one last account.
However, there may be times when you cannot free-up any extra cash to make additional payments, in some instances a consolidation loan, consolidating the accounts, can be an option.
An example may be you have 2 credit cards totalling £4,000, with the total monthly payment being £120.
You also have a personal loan of £5,000, that was for 24 months with a monthly payment of £120.
And lastly, you have a catalogue balance of £500, and a small store card with £500 on it.
Your total debt is £10,000, and your monthly payments total £290.
If you were to take out a £10,000 loan to pay off these accounts, depending on the interest rate and term, you could have payments of less than £250, and possibly £200.
This saves you money. And in the example of credit cards, gives you a set date you will be out of debt.
Unsecured Personal Loans and Specific Debt Consolidation Loans
Personal loans come in all shapes and sizes, and are usually unsecured, meaning there is no collateral, or something physically securing the loan.
The loans can be for a variety of reasons, to buy a car, to pay for a holiday, a wedding, home improvements and repairs, and also to consolidate debts.
As shown in our example, depending on the term of the loan, and the interest rate, especially with credit cards, by consolidating the accounts into one loan, you can usually save money, and know when you will be out of debt.
Consolidation loans have a purpose, but two things must be stated and known prior to entering into one:
* You need to know how you found yourself in the position of needing a consolidation loan, and make sure it doesn’t happen again.
* If the consolidation loan is to consolidate credit cards, you need to stop using the credit cards. If you continue to use the cards you will only run up balances again to pay, in addition to the new consolidation loan payment.
Secured Consolidation Loans/Equity Loans
Secured loans are loans that have something securing them as collateral, a mortgage against a property is a good example.
As your property appreciates in value, and your mortgage balance goes down, you gain equity.
Some property owners are sitting on tens of thousands of pounds worth of equity in their properties.
Accessing this equity to pay off debts, is an option, but as we will see, not always the best option.
Mortgage lenders are only going to allow a property owner to access a portion of the equity in their property, it may be 70% or less. It may be as high as 80%.
This means a property valued at £260,000, with a mortgage balance of £150,000, is said to have £110,000 worth of equity.
If a lender allows access to 70% of that equity, the homeowner may be able to get a loan for £77,000, if they qualify.
As to how they would access that equity, it my be through a re-mortgage, or possible an equity loan, a second charge against the property.
Secured loans as these have a couple of advantages:
* They can be easier to qualify for as they are secured.
* The interest rates and terms can be better as they are secured, which lowers the monthly payments.
* Weak or poor credit may be accepted as the loan is based on the equity in the property.
The one main disadvantage of a secured consolidation loan, and this is a major disadvantage, is that you are taking unsecured debts and making them secured. The accounts are now secured against your property, which means if you fail to make the agreed monthly payments, your home is at risk.
This type of consolidation loan should be used as a last resort and thought out carefully.
If you are really struggling with debts, you may wish to look at debt management options, that do not involve your property.
Another way to consolidate credit cards is to do balance transfers from one or more cards to another card.
You can take one or more credit cards with high interest rates, and transfer them to a lower rate credit card, and lower your monthly payment. There are a few things that have to occur before you can do this:
* You should research the interest rate and the amount you are transferring to see how the monthly payments will work out.
* You need a credit card with a sufficiently high enough credit limit to transfer the other cards to.
* You pay what savings you have freed up on the new credit card balance to pay it off quicker.
Credit cards with zero interest are getting harder to find, but they are still out there.
If a card offers zero 0% for 12 months, and you transfer a balance to this card, you need to pay as much extra as you can each month to pay the balance off during the zero interest period.
So balance transfers on credit cards are another way to consolidate other accounts and debts, if you have a high enough credit limit, and again stop using the cards.