Debt consolidation works by replacing multiple debts with one single obligation. It can be very effective if you’re looking to work towards clearing your debts – or you want to cut the cost of what you currently pay to borrow. However, whether you manage to achieve your financial goals with debt consolidation depends on the way that you approach it and the options you have to reduce the interest you pay. So, what’s the best way to consolidate debt?
Debt consolidation loans
The concept behind debt consolidation loans is very simple. If you currently have multiple debts, a consolidation loan can be used to combine these into one. You effectively borrow enough to repay all your existing obligations and then you are left with one single debt to manage each month.
Should I consolidate debt into one payment?
You don’t have to be struggling with money to benefit from debt consolidation. There are many benefits to opting for debt consolidation to better manage your finances, including:
- One single monthly payment instead of multiple outgoings. Most people find that they are far less likely to miss repayments or mismanage their finances after debt consolidation because one single monthly payment is easy to remember and keep track of.
- Helping you to work towards financial goals. If you have set the goal of becoming debt free, consolidating debt can help you to get there, not just in terms of clearing existing debt but making it less expensive too.
- Money management that is less stressful. If your existing debts are high cost credit, consolidating these into a single debt with a lower interest rate can reduce the expense involved and make you feel much more relaxed about your finances.
Best way to consolidate debt
Not every consolidation loan offers the same benefits so it’s important to find an option that works for you. If you think debt consolidation is going to be an effective solution for your finances the best way to consolidate debt is:
- Find a consolidation loan that means your debt will cost you less overall. The sums are simple – look at the amount of interest and/or charges you currently pay for existing debt. Find a consolidation loan that will cost less. The end result will be less interest to pay for you, which means the debt can be cleared faster.
- Look for debt that will result in a lower monthly repayment. If you’re currently struggling with high monthly payments that barely leave you enough to live on you can use consolidation debt to reduce your monthly outgoings. This works by finding a loan with a longer repayment term. You will pay more interest because you’re borrowing the money for longer but the monthly payments can be reduced to make them the more affordable in line with your current budget.
- Opt for debt that will be easier to manage. Consolidation loans are designed to make your life easier so look to consolidate debt with a lender that makes everything simple, from the applications process through to early repayment.
Why use a debt consolidation calculator?
- Work out how much you will owe overall
- Calculate the interest due on the debt consolidation loan – is this less than you’re already paying?
- Identify how many repayments you’ll need to make on the consolidation loan
- Find out what your monthly repayments will be – are these affordable and (hopefully) less than what you’re paying now?
Debt consolidation loans for bad credit
Debt consolidation loans can be especially useful for anyone with bad credit. If your credit score has taken a hit because you’ve missed repayments in the past as a result of trying to juggle multiple debts, consolidating all those debts into one is a great way to have a fresh start. You’ll be able to meet your repayments and rebuild your credit score as you go. There are lots of lenders who are happy to provide debt consolidation loans for those with bad credit – guarantor loans and homeowner loans are two options to consider.
Government debt consolidation loans
You can get government backed advice when it comes to debt consolidation loans if you’re unsure about how to approach an application. Many charities offer this kind of service, including Step Change.
Debt consolidation loans eligibility
Whether you’re eligible for debt consolidation loans will depend on the loan and the lender. This type of loan is available as one of two options: secured (i.e. loans that are taken out against your home or another asset) and unsecured (loans that aren’t taken out against anything). Factors that may influence your eligibility include:
- Whether you own a home
- Your credit score
- How much you earn
- The availability of a guarantor to support your application
Debt consolidation offers a simple solution if you’re currently struggling with your repayments or looking for a way to cut the cost or your borrowing. The best way to consolidate debt is to find the right loan, at the right price, for you.
On the “government debt consolidation loan” point, I have written this as advice rather than a loan product as I don’t think it actually exists.