Debt consolidation is refinancing debts under one loan payment. Most commonly used to bring all debt together at a lower more manageable monthly repayment.
The advantages of debt consolidation are:
Your many credit commitments (loans/credit cards/overdrafts etc) can be brought together as just one monthly payment, saving you the hassle of making and keeping track of multiple payments.
As there is just one fixed payment, budgeting will be much easier.
If the new rate is lower than the rates you have been paying on your individual debts, you could reduce not only your monthly outgoings, but the overall amount you pay back too.
By getting your debt under control and keeping up with your payments, your credit score will improve, making it easier for you to obtain credit in the future.
The disadvantages are that you could end up paying back the loan/mortgage over a longer period, than you would if the debts were kept on their current term.
What are your options?
1. You could take out an unsecured loan to pay off all the debt. The term for these kinds of loans is usually a maximum of 10 years, so depending on your level of debt, this may not work for you.
2. If you own a property and have equity (the part that’s been paid off) in it, you could remortgage your home to pay off your debts. There are two ways you can do this, you can remortgage the property to include the sum you need to settle your credit commitments resulting in the debt being paid off for the duration of your mortgage term e.g. 25 years, or you can split the mortgage. By splitting the mortgage you could have the sum to cover your debt consolidation over a different period to the term of your mortgage e.g. your mortgage over 25 years and the sum for your debts over 15 years. If you have a mortgage on your property and you are fixed into a deal, it may not be financially advisable to pay your redemption penalty. In this case, you can take out an additional loan on your property called a Further Advance or Second Charge. This supplementary amount would still be secured against your home, but would be on differing terms (interest rate, length of term etc.) than the original mortgage.
It’s important to remember that you are securing this debt against your property and should you fail to meet the repayment schedule you could end up losing your home.
If you are really worried about your mounting debts and feel it is spiralling out of control, there is free advice available from the following charities:
