If taking control of your finances feels like walking through quicksand, debt consolidation may be the answer. Whether it’s credit cards, personal loans or any other expenses that you’re struggling with, debt consolidation can be a worthwhile exercise, allowing you to simplify your finances, as well as potentially reducing your monthly outgoings and saving money too.

What is debt consolidation?

Debt consolidation offers a way to simplify your finances by taking out a single loan to pay off several smaller debts. By combining multiple payments into one, you end up with a manageable loan with a fixed interest rate and monthly repayment. This simplifies your debt repayment, so you inevitably reduce stress levels and feel more in control of your finances. Debt consolidation loans may also offer lower interest rates compared to other methods of borrowing money.

Is debt consolidation right for me?

Debt consolidation isn’t the best route for everybody and there are important things to consider before going down this route. Ask yourself and your lender, the following questions:

  • Will the interest rate on the consolidation loan be lower than what I’m paying on my current debts?
  • How long will it take to pay off the consolidation loan?
  • Are there any fees involved and how will they impact my overall savings?
  • What happens if I miss a repayment?

Some people won’t qualify for a debt consolidation loan. Lenders look at a variety of factors including whether you have a reliable and sustainable income source to meet your monthly repayments. They’ll also look at your debt-to-income ratio to establish whether your total debt is manageable and affordable based on your income.

No responsible lender will agree to a loan if there’s no clear demonstration of affordability of the monthly repayments, or if there’s any concern that it would place the borrower in financial hardship as a consequence.

Top tip: When applying for a debt consolidation loan, start by creating a budget to make sure you have a clear understanding of your current debt situation. 

Download our helpful income and expenditure spreadsheet

The debt consolidation loan process

  1. Assess your debts: Before embarking on the process, it’s crucial to have a clear understanding of your current debt situation.

    Start by gathering all the necessary information, including a detailed list of all your debts and outstanding obligations, outstanding balances, interest rates, monthly payments, the type of debt you have, and how long you have left on your term.

    Knowing the specifics of your debt will provide a solid foundation for your refinancing strategy.

  2. Apply for the loan: Approach your chosen lender with the above details of the debts you wish to consolidate, along with a breakdown of your income and expenditure. Your lender may also require sight of your last three months’ bank statements.

  3. Once approved, the funds from your new loan are used to pay off your existing debts.

  4. Repay the loan: You’ll make a single monthly repayment until the loan is paid off.

Things to think about

Whilst debt consolidation can be a good solution, it’s important to remember that there could be costs involved:

  • Loan fees: Some consolidation loans come with an arrangement or set-up fee, which could increase the overall Annual Percentage Rate (APR) payable.
  • Interest rates: Double check to make sure you don’t end up with an interest rate that’s higher than your current debts, or the total interest payable on the consolidation loan is not more than you are currently paying.
  • Penalties: Be mindful of prepayment penalties or fees if you pay off other debts early. For example, if you only have six months left on a loan, you might be better letting it run its course.

Conclusion

Juggling finances can cause both stress and confusion and debt consolidation loans can offer a practical solution to streamline your payments into one outgoing amount, once a month. But it’s not for everybody and it’s crucial you evaluate your options carefully, understand the costs, and make a plan for staying on top of your future payments by changing spending habits if necessary. Used wisely, debt consolidation can offer a practical and easy way to regain control of your finances.

Need Help?

Reach out to our friendly team at Close Finance for a free consultation on your debt consolidation options.