Debt consolidation:
Is it right option for you?
Debt consolidation loans are never the answer for everyone. It is important to check all the options that are available to you and make sure you are making the right choice.
While consolidating your debts often sounds like a promising solution, this can potentially make your situation worse.
What is debt consolidation?
Consolidating debt involves taking out new credit to pay off existing credit. Most people do this to cut down the interest rate on their debts, to reduce their monthly repayment amount or to bring down the number of companies they owe money to.
Debt consolidation is a strategy that can be useful in some situations, but for many it can involve extra costs and potentially make a situation that is already difficult much worse. It is recommended to seek expert help and information before taking out a consolidation loan in situations like this.
Debt consolidation or debt management?
Debt consolidation and debt management are two different things, but it is easy to get confused between the terminology used when trying to sort out your debts.
Debt consolidation involves taking out new credit to pay off your debts and debt management is where you negotiate affordable payments with the companies you currently owe money to. Both can lead to lowering payments but are completely different ways of dealing with debt. If you are unsure on which option, you think is right based on your circumstances then we can help you by providing you with information to help differentiate between the debt consolidated and debt management.
Need help with debt consolidation?
See through the marketing:
Debt consolidation is often made to sound like a great solution, but it is important to try and see through the sales patter and look at the facts.
| Selling point of debt consolidation | Reality |
|---|---|
| "Consolidate all of your debts into one place" | Many people taking out consolidation loans will end up spending on credit again, so many still have lots of accounts to deal with. |
| "Lower your monthly payments" | By lowering your payments, you are more than likely going to repay your debt for much longer. |
| "Reduce your interest rates" | Even with lower interest rates, consolidation loans can often end up with a higher total interest to pay because they are taken out for a longer period of time. |
| "Manageable monthly payments" | Consolidation loan payments are not always affordable. It is harder to know without a proper budget in place. |
| "Government debt consolidation" | Some companies will imply there are government debt consolidation schemes to help with debts. Such schemes do not exist. |
Secured consolidation loans:
Some consolidation loans will require you to secure the debts against your home. However, if you are falling behind with these types of debts or cannot afford to repay them, you will be at risk of house repossession.
In some cases, it may be an option to use the equity in your home to manage debts or support your retirement plans, but you should always seek expert mortgage and equity release advice if you are considering this option.We can help get you in touch with a mortgage advisor on our panel.
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