How to consolidate debt

Have you ever found yourself caught off-guard by payments due for loans, cards or overdrafts you’d forgotten about?

If so, then you know just how overwhelming it can be to manage multiple debts. But this doesn’t need to be the case.

Debt consolidation can be an effective way to streamline your borrowing, making it easier to stay on top of and less stressful to manage. Here, we’ll go into detail about what debt consolidation is and evaluate the different ways you can approach it.

What is debt consolidation?

In the simplest terms, debt consolidation is the process of using a debt consolidation loan to pay off multiple loans, credit cards or overdrafts, combining them into a single debt.

You then repay this debt as you would with any personal loan, making monthly repayments according to an agreed repayment schedule.

Why is debt consolidation helpful?

If you’re having trouble keeping up with, or keeping track of multiple payments to existing debts, then debt consolidation can help to alleviate the stress.

Common reasons why you might want to consider debt consolidation include:

Make fewer repayments each month

Turn multiple repayments into just one, making it easier to manage your debt and reduce the chances of missing a repayment. This can help to alleviate the risk of a knock-on effect, when one missed repayment and any associated charges may cause you to miss others due later in the month.

Reduce interest on your debt

Save money by switching to a lower APR loan, which you may be eligible for if you’ve been making repayments for a while. This would enable you to pay off a higher APR credit card or loan, including any early repayment charges, and reduce your ongoing monthly repayments. It is important to keep in mind that, if you extend the term of your loan, you may pay back more in interest overall.

Make your monthly repayments smaller

Reduce the size of your monthly repayments by spreading an existing loan out over a longer term. While this route will result in paying back a greater amount overall, it will allow for extra wiggle room in your monthly budget.

Pay off your debt faster

Pay off your debts quicker by shortening your loan term, paying a larger amount each month and reducing the overall interest as a result. This can be an appealing option if you have the flexibility in your monthly budget to do so.

What are the advantages of debt consolidation?

There are many benefits to debt consolidation, depending on your circumstances and why you’re looking to consolidate. Some of the most common advantages of debt consolidation include:

  • Simplifies your repayments
  • Eases the stress of managing multiple debts
  • Can help to improve credit score if repayments are consistently met
  • Can reduce interest compared to your current debts
  • Only requires you to be in touch with one lender
  • Gives you a clear timeline and a date for when your debt will be repaid

What are the disadvantages of debt consolidation?

While debt consolidation can be beneficial, it is not without its risks and important factors to consider:

  • You might end up paying more overall and over a longer period of time
  • You may be required to pay setup charges on the new loan, or early repayment charges on your existing loans
  • If you have taken out a secured loan against your home, then your property may be repossessed if you do not keep up repayments
  • If you have a lower credit score then you may only be able to get a loan with a high interest rate

What can I use a debt consolidation loan for?

There are many types of debt, but some of the most common forms of debt that you might want to consolidate are as follows:

Consolidating credit card debt

Consolidating credit card debt involves taking out a personal loan to pay off your credit cards. It’s worth checking that the monthly repayable amount on the debt consolidation loan comes to less per month than it would be to make all of your existing credit card payments individually.

Consolidating personal loan debt

If you have multiple personal loans against your name, it makes sense to consider consolidating them to make them more manageable. A good thing to check is the existing APR on your loans and compare this to the APR of the consolidation loan.

Consolidating overdrafts

Overdrafts are an easy form of debt to overlook, as they can often creep up on us when regularly using a debit card for any day-to-day spending without a clear budget. In some cases, overdrafts will be offered interest-free when a new bank account is opened. When this grace period ends however, any overdraft currently being used will start to accumulate interest.

Consolidating store card debt

Store cards can be appealing, offering many rewards and benefits for repeat customers. But, like any credit card, it’s important to stay on top of repayments in order to have the best chance to build your credit score.

Frequently asked questions about debt consolidation

Does debt consolidation ruin your credit?

Consolidating your debt with a personal loan could improve your credit score over the long-term, but may cause your credit rating to drop slightly in the short-term. This is because the application process for a debt consolidation loan, like any form of credit, may require a “hard search” on your credit report.

Can I combine all my debt into one payment?

Yes, if you’re eligible for a loan amount that allows you to repay all your debts in full. A debt consolidation loan allows you to pay off multiple existing debts and replace them with a single debt and monthly repayment plan to a single lender.

What is an unsecured loan for debt consolidation?

A personal loan for debt consolidation is an unsecured loan, used to pay off one or more existing credit products. It is not tied to your assets or any collateral, such as your property.

If you are thinking of consolidating existing borrowing you should be aware that you may be extending the term of the debt and increasing the total amount you repay.

What is a secured loan for debt consolidation?

A homeowner loan for debt consolidation is a secured loan against your property. Secured loans are beneficial if you need to borrow a larger sum.

Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

How to get a debt consolidation loan today

The process to get a debt consolidation loan is simple.

1) Calculate how much you owe

Review all of your existing debts, contact the providers and ask how much it would cost to close your account. Be aware that the value of your debt may change from the point at which you make this inquiry, so you may want to ask what the value on the account will be in a few weeks’ time as well.

2) Borrow that amount

Find a lender that offers an appropriate personal loan with an achievable monthly repayment plan and timeframe. As a broker, we can help you to browse debt consolidation loans and providers, in order to find one that suits your needs.

3) Pay off your existing loans

Once you have received the funds, make sure to contact your existing debt owners and take any necessary steps to pay off the amount owed in full. Once repaid, ensure that the account has been closed.

4) Repay the debt in monthly installments

With the weight of your former debts lifted, you now just have to focus on one monthly repayment. A good practice is to create a monthly budget and transfer the monthly repayment shortly after your payday or any other recurring monthly income.

Looking to consolidate your debts?

Take control of your finances and learn how Freedom Finance can help.

Explore our debt consolidation loan options