It’s a sad fact of modern life that increasing numbers of us find ourselves in unmanageable debt. Many of us took out credit on the never never, from store cards to payday loans, from overdrafts to credit cards. Thankfully we’re not stuck with repaying our existing debts off at their current interest rates, and can save money by consolidating our debts with a loan. Debt consolidation loans are similar to personal loans, but rather than spending the money on a new car or home improvement the loan is used to repay existing debts.
How much could you save?
APR offered is a very personal matter – no two customers are the same to a bank, so while Representative APR figures are used they might not be the interest rate you are offered. Nevertheless in most cases you will be offered a substantially better rate with a debt consolidation loan than you are paying on your existing borrowing such as other loans, overdrafts, credit cards and payday lending. Halving your average APR will cut your annual cost of borrowing in two. Over the long term it’s likely to cut it even further too, as you can spend more repaying your balance rather than paying interest and hence be out of debt quicker.
Which loans should you consolidate?
There’s little point in consolidating already cheap forms of credit. Do not place credit with a lower interest rate into a debt consolidation loan as this will only increase the amount you are paying. Prioritise your debts by interest rate, and pay back those with the highest rate first. After getting your quote on a debt consolidation loan, calculate how much you need to pay off all loans that have a rate higher than the loan then take out a loan for this figure. It’s important to ensure you can afford the monthly repayments first though, as missing repayments can lead to further financial problems. You also need to be certain you can afford all the essentials and have a little left over each month for emergencies so you can avoid taking out more credit.
Can you borrow more?
Rules on what you can borrow for change between lender, but often if you have a genuine need to borrow more money than what is needed to repay your existing debts lenders will consider this. For instance if you need to buy a car to get to a new job, or need to fund retraining for a better career path, lenders will consider this a good reason to increase the loan beyond what is needed to repay your existing debt.
Is there a cheaper alternative?
Increasing numbers of personal loans are available for use in debt consolidation. In fact many of the loans listed here are personal loan products. These are often cheaper than dedicated debt consolidation loans, but not always. Another alternative to consider is a secured loan. These will usually be cheaper for homeowners who have a poor credit history, although they do add the risk of losing your home should you fail to keep up with repayments.
