Taking out a short term loan can often be an excellent way to cover an unexpected cost. However, taking out several loans alongside other borrowings can become difficult to repay. One solution for you if you are struggling to keep up with the monthly repayments is debt consolidation. Here, we explain what debt consolidation is and whether it could be a good solution for you.
Understanding Debt Consolidation
Debt consolidation and debt management are two different things, so don’t get them confused! Both are intended to help manage your monthly payments, but it’s all about deciding which option will be right for you.
Debt Consolidation merges all of your debts together into one single debt that covers them all. This can make repaying your debts much easier because it means you only have to make one single payment every month.
This consolidated loan could repay outstanding debts on credit cards, personal loans or store cards.
Make sure if you do choose to opt for a debt consolidation that you know if the loan is unsecured or not. An unsecured loan means that you lent the money based on whether they believe you are likely to repay, which is based on your credit history. A secured loan is secured against a valuable asset such as your house, which means your home could be repossessed if you fall behind on your payments.
It’s important to note that if you do choose to consolidate your debts you should not take out any other loans or credit and you should destroy your credit cards until you have got your finances back on track.
Advantages to Debt Consolidation
All of your outstanding credit is in one place — It makes repayment simpler as you only have one interest rate and one single repayment.
It could improve your credit score — Once your debt is consolidated and you are able to manage your monthly payments, you may see your credit score improve. This is because lenders and banks can see that you’re able to keep up with payments and are therefore more trustworthy to borrow money.
Disadvantages To Debt Consolidation
You could end up paying back more —Consolidating your debts and repaying over a longer period of time could see you paying back than if you pay them back separately.
Higher interest rates — If you move your credit card repayments to a consolidation loan, you may end up with higher interest rates. A way to avoid these is to do a balance transfer on a 0% introductory rate.
Early repayment fees — Unlike PiggyBank, many lenders charge a fee to fully repay a loan before the end of its term. Check the terms and conditions to make sure you know whether these fees apply.
Is Debt Consolidation Right For You?
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