Beginner’s guide to debt consolidation
If you are faced with multiple debts that you are struggling to repay, debt consolidation could make your debts much easier to handle. It works by consolidating all of your debts into a convenient single monthly payment, which is often lower than your previous monthly payments (although if you achieve this by extending the term, this may involve paying more in the long run).
Here we look at two of the main forms of debt consolidation: debt consolidation loans, and debt consolidation remortgages (which are exclusive to homeowners).
Debt consolidation loan
When you take out a debt consolidation loan, it pays off all your existing debts, after which you will be expected to pay the total amount back over a set period of time, in single monthly payments.
When you take out a debt consolidation loan, you can arrange to pay back the loan over a longer period of time and in smaller amounts each month. The interest rate may be lower too, particularly if your debts include high-APR forms of credit such as credit or store cards.
In a way, a debt consolidation loan is the safer option compared to a debt consolidation remortgage, because it is not secured against your assets and therefore you stand to lose less if you run into trouble with repayments. However, the downside of this is that the amount you can borrow will be more restricted, and interest rates tend to be higher than with a debt consolidation remortgage.
Debt consolidation remortgage
A debt consolidation remortgage is similar to a debt consolidation loan, except you draw the money from equity tied up in the value of your home, and repay the amount on top of your regular mortgage payments.
Your equity includes any deposit you put down on your home, the amount of your mortgage you have paid off, and any increase in the market value of your home – in other words, the bigger the deposit and the longer you have been in your home, the better placed you are to take out a debt consolidation remortgage.
There are two advantages of a debt consolidation remortgage over a regular debt consolidation loan: the repayment can be spread over the entire duration of your mortgage (typically 15 or 25 years, but sometimes even longer), and the interest rates are often lower, since your mortgage is secured against your home.
How do I find out more about debt consolidation?
To find out more about debt consolidation and a range of other debt solutions (debt management plans, IVAs etc.) you should contact an expert debt adviser. They will speak to you about your personal situation and help you decide which debt solution is best for you.
Useful Websites:
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Getting out of debt – A free 200 page ebook by Tony Palmer full of practical advice on debt problems and help with getting out of debt. Read the full text of this debt book online for free.
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