There are generally two types of people that consider debt consolidation.
The first is those who have debts across various lines of credit, such as loans and credit cards, and are simply looking to put all of this debt in one place so it is more convenient and easier to keep track of. In doing this there is a possibility that they will also be able to take advantage of a lower rate of interest and thereby pay down the debt sooner.
If you are in this position and you have a good credit score then you will most likely be able to take out a debt consolidation loan to pull all of your debt into one place.
If you are a homeowner with equity in your property then you will almost certainly be able to secure a loan against this equity.
In addition to making your debts easier to manage, a debt consolidation loan can also serve to free up extra money each month, either by reducing interest payments through a lower annual percentage rate (APR) or by stretching the debt so it is repaid over a longer period of time.
However, if you are doing this you need to weigh up whether the short term gain of some extra money each month outweighs the fact that, in the long term, you will actually be paying back more.
Also, when taking out a debt consolidation loan be sure to read the small print and find out the interest rates, total amount you’ll pay back and if there are any early repayment penalties. It may also be a good idea to seek professional financial advice before taking out a loan, to make sure that it the best option open to you.
Another way to consolidate debt if you have a good credit history is to transfer any credit card balances onto an interest free credit card. Balance transfers are a great way of paying down credit card debt as any money you pay off the balance will come straight off the actual debt and won’t go to the lenders in interest.
However, when transferring a balance in this way it is vital that you keep up with at least the minimum monthly repayments as failure to do so will most likely result in you losing the interest free period and a high interest rate will be placed on your debt, leaving you no better of than when you started.
So what of the other type of person that could be looking for debt consolidation?
The other type of person is one that is struggling to keep on top of their debt, are falling behind with payments and are in need of debt relief. If their accounts are going into arrears then there’s a good chance that this will be reflected in their credit file and they will struggle to get any sort of debt consolidation loan.
For anyone in this position, a debt management plan is probably the way forward.
These are agreements that are entered into between lenders and borrowers, often with the help of a credit counsellor, that are designed to lower the interest payments for consumers who are struggling to meet their monthly repayments.
The problem with debt management plans is that they can damage your credit score even further and a record will be kept on your file for at least five years. In addition, you will not be able to take on any extra credit whilst in a debt management plan.
Another thing to be wary of are companies that will set up debt management plans for a fee. These are often an unnecessary cost as debt management plans are something that you can arrange yourself, simply by talking to your creditors.
Overall, the best option would be to take out a debt consolidation loan wherever possible as this will not have a negative impact on your credit score.
However, if you already have a bad credit rating and you are struggling to meet your monthly repayments then a debt management plan could be the only option.
Either way, it is best to seek professional financial advice before taking out a debt consolidation loan or embarking on a debt management plan.