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What's Debt Consolidation?
Consolidating your debts essentially means finding a way to combine them into one solution. It’s a particularly good idea for those in debt who owe money to multiple creditors, as dealing with so many at once can become hard to keep track of and things can get confusing.
If you are in debt and owing money to multiple lenders, it may be a good idea to opt for a solution that helps you deal with them in one go. Consolidating your debts can be done in a variety of ways and it’s worth looking into if you are struggling to get on top of things.
In most cases, we advise seeking debt advice from specialists such as ourselves before jumping in.
Thinking of consolidating your debts?
Our experts will be able to discuss your options with you.
How Can I Consolidate My Debts?
Debt consolidation can be done in a variety of ways to make things easier for you, however, you should be aware that not every type of debt is the same, and some may not be eligible to be consolidated along with other ones in certain schemes.
It’s important to consider which option would suit you and your personal situation before making any decisions. Below are some of the main solutions which allow a form of debt consolidation:
IVA – This allows you to enter certain debts into an agreement, where you make one monthly payment which goes towards them all and the rest is written off.
Bankruptcy – If you have little to no ability to pay off your debts, you can apply for Bankruptcy and these can be written off after one year. Your assets may be sold to contribute towards repayments to your creditors.
Debt Relief Order – Here you can freeze your debts for a year and have eligible debts written off after this time.
Debt Management Plan – You can combine eligible debts into one monthly payment handled by a 3rd Party Company. Your one payment contributes towards your debts, as well as the fees of the company handling it.
Another method of consolidating your debts is done by a ‘Consolidation Loan’ – this is where you open a new account and use the credit from this account to pay off other credit card and loan debts. In doing so, you may be able to close down certain accounts or at least reduce the amount owed to them. This doesn’t reduce your overall debt level, as you will still owe money to the new account to cover the credit you have used – but it does mean that you may be able to reduce the number of creditors.
By paying off multiple old accounts by borrowing credit, you essentially transfer the debts to your new account – so instead of dealing with numerous creditors, you consolidate these into one.
Things to be mindful of:
It’s important to remember that with a Consolidation Loan, you don’t reduce the amount of money you actually owe, you just move it all into one place.
It’s crucial that you keep up payments towards your new account so that you don’t land in further financial trouble. It’s always worth looking into this thoroughly beforehand and consider what your monthly repayments would be exactly, to understand whether or not this is an affordable option for you.
By opening up a new account, the new lender will have to carry out a ‘hard’ credit search, which will have a negative impact on your credit score. However, keeping up regular repayments is the best way to improve this again, and in doing so your score will increase over time as your overall debt level decreases.
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Being in debt can be daunting, but putting together an action plan will feel like a burden has been lifted
There are two options when it comes to debt consolidation:
The first involves finding a solution that enables you to combine your debts and deal with them together, generally making one payment towards multiple creditors at a time.
The second is a Debt Consolidation Loan which means you borrow credit from a lender and use that to cover/close down multiple other debts, leaving you with just the new lender to deal with.
The debts that can be involved in consolidation will depend on the type of solution you go for. Not all debts may be covered so make sure you know exactly what lenders you will need to keep up repayments to before choosing a solution.
If you do take out a consolidation loan, it would be up to you to decide which of the debts you would like to deal with and pay off first.
Benefits of debt consolidation include being able to streamline your repayments to make them more manageable. Certain solutions also mean that your creditors are not allowed to contact you whilst you go through the process.
There are certain points to bear in mind when considering consolidation.
With a consolidation loan, it’s important to remember that you aren’t getting rid of your debts entirely – you still owe the same amount of money, just to one new lender.
There is also usually high fees and interest with these loans.
Whilst a consolidation loan may be a suitable option in certain circumstances, it’s not always the answer. If you have struggled to make repayments towards your existing debts, then you are likely to struggle to pay back the consolidation loan you have taken out, plus the interest that this may generate.
Everyone’s situation is different, so whether or not you opt to consolidate your debts is entirely up to you, however, it does help people who are owing debts to multiple creditors and are struggling to keep up with repayments.
If you’re in debt, it’s most likely that your credit score is already not looking good, however, the sooner you are on your way with a solution then the sooner you can start improving your credit score.
If you take out a consolidation loan, then your score is definitely likely to worsen as you will essentially be doubling the amount you owe. Even though this money will be intended to pay off debts, it’s still seen as ‘borrowing’ by your lenders which will show that you are continuing to struggle with repayments.
At Money Advice, we can help guide you through solutions that will enable you to consolidate your debts with the goal of making them more manageable and affordable to you.
We are not a lender, so we do not offer consolidation loans.
If you’re considering debt consolidation, it’s worth writing down exactly what debts you owe and who your creditors are.
If you’re unsure about this information, then there’s no need to worry – here at Money Advice, we can bring up the information regarding your debts for you. We can run what’s called a ‘soft’ credit search for free which will show us exactly what debts are outstanding.
The importance of a soft credit search is that this does not leave an imprint on your file – only you will be able to see that this has been carried out.
This is a quick process and with this information we will have an even better idea of what solutions you qualify for.
We use the main credit companies in the UK for these checks – these companies are:
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*To find out more about managing your money and getting free advice, visit Money Helper, independent service set up to help people manage their money.