Your guide to debt consolidation

The idea behind consolidating debt is very simple. Rather than juggling a variety of obligations such as credit cards, overdrafts and other high-interest debts, it makes practical sense to gazump the whole lot with a solitary, low-cost loan to pay them all off.

On one hand, you’re saving yourself an enormous amount of hassle in terms of convenience, given that you’ll no longer be worrying about multiple debts, with differing APRs, monthly repayment dates and repayment amounts. But more importantly, by leaving yourself with a single loan with an APR lower than the collective of your previous debt(s), you’re potentially saving a fortune in interest, and therefore reducing your overall liabilities.

Debt consolidation and credit cards

One of the most common types of debt that is consolidated is that of credit cards; which is why these type of loans are sometimes referred to as ‘credit card refinancing loans’. And it makes sense, especially when you consider that the Representative APR on credit card purchases in the UK (as stated in the UK Cards Association September 2015 Report) is 17.9%.

What’s more, one of the big killers for those with large credit card balances is making only the minimum repayment amount each month. Credit card providers often encourage this, with short-term 0% APR offers and/or setting very small repayment minimums. It can thus deflect a borrower’s focus away from paying off the capital balance as quickly as possible in favour of spending their money on other things.

This, in turn, leaves them stuck in this cycle of debt for longer, paying more and more in interest, and ultimately filling the pockets of credit card companies while leaving a big hole in their own. A personal loan provider, on the other hand, would generally offer a robust monthly amount devoid of such temptations, ensuring that you pay off your debt quicker and save a lot more in interest in the long run as a result.

Are there any risks with debt consolidation?

If, after consolidating your debt, you are left paying less in overall fees and interest, then, on the face of it, there should be no risks or drawbacks to your decision. However, there are certainly some questions you should ask of yourself – or any lenders you may be considering – before deciding if debt consolidation loans are for you:

• Is this just a short-term fix? Have minimum repayments been all you could afford, or will you be able to meet the repayments of the new debt consolidation loan?
• If the repayment amounts on the new loan are lower, is this because you’re putting yourself in debt for longer than with your previously existing debt(s)? If so, will you be paying more interest over time as a result?
• What fees and charges are involved with your new loan? Will you be penalised for late payments, or early settlements?
• Is your credit score optimised? This is the main determinant of what your APR will be for a debt consolidation loan, so it may be worth taking some steps to improve your credit rating before applying for it

Applying for your loan

If, having factored in the above, you decide consolidation is the way to go, then good on you for taking proactive steps to save yourself money! The good news is that applying for this type of loan is usually very straightforward. It is also advisable to read the fine print and ask all the questions that need to be asked in order to ensure that you have a loan that you fully understand, and with a repayment structure you are comfortable with.

And, most importantly, keep up the positive momentum. After all, you’ve just made a responsible decision to reduce your overall debt. With an ostensibly ‘clean slate’, it may be tempting to now up your spending. Make sure you avoid these kinds of temptations though, and rather prioritise your remaining debt. This is the ticket you’ve given yourself to a debt-free life. Be sure to stay the course!