Debt Consolidation Options, by Jon Nuttall

‘Clear all your debts today with one easy monthly payment’
‘Fast pay out, whatever your credit history’
‘We like to say yes’
‘Apply online now for a quick decision’

These are just some of the tempting offers that we see daily, inviting us to look at consolidating all our debts into one easy payment.

Debt generally refers to money owed by one party, the debtor, to a second party, the creditor. It is generally subject to repayments of principal and interest. Interest is the fee charged by the creditor to the debtor, generally calculated as a percentage of the principal sum per year known as an interest rate and generally paid periodically at intervals, such as monthly. Debt can be secured [with collateral such as a mortgage] or unsecured [such as a personal loan].

Although there is variation from country to country and even in regions within country, consumer debt is primarily made up of home loans, credit card debt and car loans. Household debt is the consumer debt of the adults in the household plus the mortgage. In many countries, especially the United States and the United Kingdom, student loans can be a significant portion of debt but are usually regulated differently than other debt. The overall debt can reach the point where a debtor is in danger of bankruptcy, insolvency, or other fiscal emergency.

What is debt consolidation?  Debt consolidation is a form of debt refinancing that entails taking out one loan to pay off many others.  This can either be through secured borrowing against an asset, such as your home, or through further unsecured borrowing, such as a personal loan.

Whilst consolidating all of your existing credit commitments into a single monthly repayment might sound like a good idea, particularly if you have a number of creditors to deal with each month, there are a few things that you must consider:

1. As with any loan, it’s important to make sure that you can afford the repayments. Does the proposed new arrangement enable you to comfortably meet your essential living costs (such as food, clothing and travel) and priority expenditure (such as rent/mortgage and council tax) each month? A poor credit history more often than not means poorer credit terms and a higher monthly repayment.
2. By taking out another loan, you are actually paying back an even larger amount over a longer period of time. You need to make sure that you understand when your repayments will finish and that you are comfortable with the duration of the new loan.
3. Is there an alternative to increasing your debt that will allow you to become debt free sooner? There are many alternatives to taking out another loan that will actually reduce your debt, freeze interest and charges and legally prevent your creditors taking any enforcement action against you – research IVA, Debt Relief Order and Bankruptcy for further details.
4. A debt consolidation company will usually look to secure larger loans against an asset such as your home (the interest payable on an unsecured loan will be much higher), which means that it will be at risk if you do not keep up with repayments.

Finally, if you do decide to consolidate your debts, it’s important not to give in to temptation and start building up new debts again whilst you’re paying off your old ones.

If you own a property and are in a position where your debts are becoming too much and as a result you are starting to miss payments, you also have the option of selling your home to clear all your debts and start a fresh.  There are a  number of specialist cash buyers in the UK Property Market, one of the most prevalent being UK Homebuyers Ltd, who are in a strong position to move quickly and buy your property so you can clear all your outstanding secured and unsecured debt.  It is extremely important that you carry out your own due diligence on the company before you accept an offer.  It is equally as important to meticulously calculate your total debt [including any early settlement fees etc] before you agree terms with a cash buyer.

To summarise, debt consolidation can result in a positive outcome for many borrowers.  The process can reduce your monthly commitments and one monthly payment can simply make life easier.  That said, please ensure you carefully read the terms offered by the new lender and consider all of the facts before you decide to proceed.