Debt consolidation may be advertised as the one-size-fits-all solution to the ever increasing debt management problem in the UK, but it certainly has its own set of drawbacks and limitations.
What is debt consolidation?
Debt consolidation has become a popular financial tool for consumers in the UK who simply have too many debts and are struggling to manage these on a day to day basis. It allows one to combine a multitude of debts into one larger debt.
You can consolidate using a balance transfer credit card, a personal loan or home equity. Although there are three options, these will not necessarily lead to successful debt consolidation-simply because consolidation in itself is not a viable solution for all UK households.
The primary aim of debt consolidation is to help you manage your debts with ease, since you’ll have only one repayment to make as opposed to multiple. You would also aim to free up some money by ensuring this single monthly payment is lower and save by securing a lower interest rate.
With that being said, these three top benefits are not always available to everyone and many people only sink themselves deeper into debt by consolidating without doing the calculations and option comparisons that they should’ve.
Your 3 debt consolidation options
#1) Consolidate debt with a balance transfer credit card
If the majority, or your most problematic debt is in the form of credit card balances, you may be able to consolidate your debt using a balance transfer credit card. These cards generally have 0% interest introductory periods within which you can repay your debt without having to worry about interest.
In order to determine if using a balance transfer credit card is ideal for your particular situation, you should use a credit card calculator and determine what you are and, will be, paying in the form of interest. You can then find out what you will be charged as a fee to transfer balances and see how much money you will save overall.
UK’s leading balance transfer credit cards
From Barclays and Halifax to Virgin Money, we have a wide range of available balance transfer credit cards. These lenders include both large banks and leading retailers, airliners and credit card providers.
Finding a provider is not as important as choosing a credit card product that not only offers a 0% interest period but that has reasonable fees and terms and conditions.
Tips to choose a balance transfer credit card
- Calculate how much you are paying in the form of interest on your balances and how much you will pay in fees if you transfer balances onto a new credit card.
- Take into account the APR or comparison rates for all the credit cards you are considering.
- Ensure you will be able to include all your credit card balances into the transfer credit card as there may be limits in the form of a minimum and maximum amount.
- Always check the interest free period and ensure you are able to repay your debt before this period ends for balance transfers.
- Ensure you know the terms and conditions which you need to abide by in order to retain the 0% interest period on balance transfer credit cards.
- Make sure that you know the revert rate as this will affect you once the interest free period has expired.
#2) Consolidating debt using home equity
Home owners who have equity in their homes may be lucky enough to consolidate their debt into their current mortgage. Home equity is simply the value of your property compared to what you still owe the bank.
This is one of the simplest ways to consolidate debt but you must bear in mind that the added debt will incur interest over a very long period of time and will therefore end up costing you more.
This is still however, a very good option for people who are battling to keep up with their debt repayments and other financial obligations and wish to clear up some income for the short-term.
Another warning about using home equity to consolidate debt is that once you’ve remortgaged and cleared up personal loans and credit card debt, you may be tempted to get into debt once again. This is something that happens very often with UK households relying on credit cards and loans for a range of expenses and purchases.
#3) Consolidating debt using a personal loans
Debt consolidation loans, are simply personal loans and can either be secured or unsecured. Unsecured debt consolidation loans will cost more in the form of interest but may be ideal for those with smaller debts and those without home equity.
Secured debt consolidation loans are simply personal loans that are secured against your home. For this option to be viable, you should have some home equity. This option should however not be confused with remortgaging for the purpose of debt consolidation.
This personal loan will be entirely separate from your home loan and will be repaid in installments that are also completely separate. If you default on your consolidation loan the bank may be able to repossess your property, this being one of the major downside of consolidating in this way.
To choose the ideal debt consolidation loan you should make use of loan comparison sites and use the APR or comparison rates to compare interest. You should also check the available repayment terms and make sure your ideal term is possible.
When you should avoid consolidating debt
- If you are likely to take on more credit once you have consolidated all existing credit, you should stay well clear of this option and rather work on developing a debt repayment plan that works with your budget.
- If you have small balances left on your loans, consolidating these debts will likely cost more once you factor in all the consolidation fees and interest, not to mention that your loan term will be longer.
- If your outstanding debts are too large you may actually also end up paying more in both the form of installments and interest, always use the necessary loan calculators when determining costs.
- If you have already missed payments on existing loans and credit as this means you have bruised your credit and will only be offered bad credit loan options which will cost you more.
Whether you decide to make use of a balance transfer credit card to clear credit card balances or to remortgage and combine your debt into your home loan, always make the necessary calculations ahead of time and complete a loan application once you are sure of the best way forward.
If you are unsure of what the best option is, don’t be afraid to seek out professional advice, many financial consultants and advisors will be able to work out the outcomes of a range of options and help you make the best decision, even if that means not consolidating at all.
Finally, if you’re struggling to manage your debt repayments, doing nothing is not an option as this generally causes more harm than good and, will simply make a bad situation worse.