One of the first and most important elements of getting on top of your finances is to look at your debts.
Having multiple loans and credit cards which are all on different length terms, different rates, and coming out of your account on different dates, can be a bit overwhelming and may make you feel like you don’t know where to begin.
Consolidating your debts can eliminate a lot of stress by making your debts much easier to manage.
This guide goes through the different benefits of debt consolidation.
First, what is debt consolidation?
Debt consolidation means using one loan facility to clear all of your existing debts. Debt consolidation loans can come in different forms, for example, secured loans, personal loans, or even balance transfer credit cards. The right product for you is dependent on a number of factors such as your credit history, whether you own your home, and your income.
1. Make your debts easier to manage
If you have multiple credit cards, personal loans, and/or mail order accounts, it’s likely that the payments for each one are being taken out of your account at different times of the month. It’s also likely that the parameters for each facility are all different in terms of whether you’re making just minimum payments, interest only repayments, or capital repayments.
This can make your debts really hard to manage and keep track of.
Consolidating your debts into one loan means you will only have one monthly repayment, making paying your debts a much easier and stress-free process. As this will automatically come out of your account every month (on a pre-agreed date), you won’t have to think about it anymore or worry about missing any payments.
2. Lower your monthly outgoings
Secured debt consolidation loans generally offer much lower interest rates than personal loans and credit cards.
The average rate of a credit card is around 40% APR, comparing that to a secured loan where average rates sit around 6% to 10% APR.
As well as reducing the rate of interest you’re paying, secured loans can be taken out over a much longer loan term than personal loans and credit cards which helps to bring down the monthly repayment.
It is important to be aware that while you’re making short term monthly savings, you may increase the amount that you have to repay in total due to extending certain debts over a longer period of time.
Using a debt consolidation loan calculator is the best way to get an idea of how much a debt consolidation loan will cost and how much you could potentially save per month.
3. Improve your credit score
Over the course of a few months, having a debt consolidation loan could massively improve your credit profile; if you manage it correctly.
First of all, settling any credit card or loan balances will have a positive effect on your score – especially if there are any missed payments on these accounts.
Secondly, demonstrating that you can keep up the repayments on a secured facility will help to build your overall credit profile over time.
4. More security
Credit cards and store cards are known as a revolving credit which means there is no fixed end date. Products like this, including personal unsecured loans, generally don’t offer fixed rates either which means your rate of interest could go up at any point, making the debt more expensive.
Secured debt consolidation loans are set up over a fixed term with pre-agreed monthly repayments, meaning you’ll have security in knowing when the debt will be repaid. You can also get fixed interest rates over terms up to 5 years which means you’ll have certainty that the rate won’t go up during this time.
This can massively help you with budgeting and keeping control over your monthly expenditure.
5. Step to remortgage
Generally speaking, first charge mortgage products attract lower interest rates than second charge products. However, most first charge mortgage providers don’t offer loans for debt consolidation purposes. So, a second charge loan can be used to consolidate your credit cards and personal loans to reduce your monthly outgoings, and then a few years later you can refinance and consolidate your mortgage and secured loan into one product.
Ultimately, there are a large number of benefits to consolidating your debts and it may be one of the best steps that you can take in terms of regaining control over your finances. However, you should always speak to a broker or financial advisor before making any decisions as they will be able to guide you in terms of the right product to choose.