Guide to Debt Consolidation

Debt, as almost everyone is aware, is easy to get into, but much trickier to escape. Consolidating everything you owe into a single repayment can be the most simple, convenient and inexpensive method of getting back into the black.

There are several ways to amalgamate all your existing debts into one monthly instalment that not only saves money but also helps get rid of a potentially bewildering array of creditors.

• Unsecured loan. This is a sum from a bank or another lender that is available at a competitive rate and requires no security, meaning your home or other assets are not at risk should you default on repayments.
• Credit card. Many credit cards offer very low interest – sometimes 0% - on transferred credit balances. Though there is almost always a time limit on how long you can enjoy low interest and the cards still usually charge high interest on purchases.
• Advance from your mortgage provider. It may be possible to borrow more money from your mortgage lender, a sort of cash advance that is covered by the same terms and conditions that apply to your mortgage.
• Second-charge mortgage. This is not remortgaging, but a loan secured on property from a lender other than your mortgage provider. If you do not keep up with repayments, your home could be at risk. In that case, the second-charge lender will take its due once your mortgage provider has been satisfied.
• Remortgaging. By borrowing based on the value of your home you can pay off your existing mortgage, with the distinct possibility of getting a better deal the second time around.

Remember: always shop around. Too many people keen to consolidate their debts take the first opportunity available to them, unaware that there are lower rates and other options available.

Before you commit yourself, you should be sure that a consolidation loan is the best solution for you. There are cons as well as pros. It may, for example, better to contact your creditors and come to some sort of arrangement – perhaps one that allows you to make smaller payments over a longer period of time.

Seeking the help of a debt counselling service, such as Solve My Debthttp://www.solvemydebt.co.uk or the free National Debtlinehttp://www.nationaldebtline.co.uk, might be the answer. These services offer advice on budgeting, dealing with creditors and making affordable repayments that satisfy both parties.

Services to avoid are the ones that promise to remove information from your credit file. This is impossible to do. The only data that can be changed or removed is that which is incorrect – and you can deal with this yourself. Other firms will claim they can ‘rebuild’ your credit history, but you can do this by handling your debts effectively.

You must consider whether debt consolidation is cost effective in the long term. Paying off an existing debt may incur charges for early settlement, and there may also be a fee for arranging your consolidation loan.

Also, by taking out a new loan, you will be extending the period in which you are paying off debts – and that might mean a greater interest cost in the long run. Finally, many lenders add payment protection insurance to their loans without borrowers’ knowledge, which is often more expensive than similar cover freely available elsewhere.