There is more than one way to consolidate debt. The right one for you depends on your situation – how much debt you have, whether you can still afford your payments, and so on.
Debt consolidation loan
A debt consolidation loan is a new loan used to pay off other debts. This can help to reduce your payments, and because you’ll be left with one debt instead of many your finances could become easier to manage.
You should also be able to reduce the amount you pay each month by spreading your repayments over a longer period of time. For example, replacing debts that would have taken three years to pay off with a five-year loan will make each repayment smaller. However, this will mean paying more interest than you would over a shorter period.
Debt consolidation with a credit card
An alternative to using a loan to consolidate your debts is an interest-free balance transfer credit card. You will only normally be allowed to consolidate other credit card debts this way, but it can be a very cost-effective way of repaying debt – because you should pay little or no interest at all.
For example, let’s say you have three credit cards, all charging around 18% interest. Moving the debts onto a 0% interest credit card could significantly reduce the overall amount you pay.
But be aware: the interest-free periods are time-limited, typically for around 15-20 months. After that time you’ll start paying interest again, so it’s best to try and repay everything before the 0% interest period expires.
Also remember that these deals are only available to people with a very strong credit rating, so it’s probably not worth applying (and potentially damaging your credit rating) if you have had any trouble with credit in the past.
Debt consolidation for serious debt problems
Consolidating your debt with a loan or credit card is only suitable if your finances are in reasonably good shape. If you’re struggling financially it could actually make things worse – but there are debt solutions that could be more suitable.
For example, a debt management plan is aimed at people who can’t afford their debt repayments, but can afford to repay what they owe within a reasonable period. It works by reducing your unsecured debt repayments to an affordable level, meaning you’ll repay your debts over a longer period than planned.
For even more serious situations in which the borrower can’t afford to pay everything back within a reasonable period of time, an IVA (Individual Voluntary Arrangement) could help. This also reduces your unsecured debt repayments, but it only lasts for five years – after which any remaining unsecured debt is written off (if the arrangement has been successful).
Bear in mind that because both these solutions involve paying less than originally agreed, they affect the borrower’s credit rating. In the case of a debt management plan, the overall interest to be paid could increase unless the lenders agree to freeze it.
Take a look at this article for more information about credit card debt consolidation.
Further Reading:
- Everything You Need To Know About Debt Consolidation Loans - Simply put, a debt consolidation loan is a loan that enables you to reroute all of your debts through a...
- Credit Card Debt Consolidation Loan - Credit card debt consolidation is regarded as the first step towards getting rid of credit card debt. Credit card debt...
- What Is The Best Way To Pay Off All Of My Debts Using A Free Debt Consolidation Loan - Between daily expenditures and monthly bills, most people get bogged down by outstanding debts with high interest rates. When this...
- Low Interest Debt Consolidation Can That Really Attractive Loan Package Actually Be Hazardous To Your Financial Status - The main purpose of taking out a debt consolidation loan for most people is to save a few more dollars...
- The Benefits Of Unsecured Loans For Debt Consolidation - Unsecured loans for debt consolidation are loans that do not require collateral. Debt consolidation loans are claimed to help debtors...