So what is Debt consolidation?
Debt consolidation is bringing together all your debts under one umbrella to a new financial product such as a credit card or loan in a bid to save on interest payments from your various debt obligations. You will usually then have to make one monthly repayment to cover this new debt rather than lots of little payments.
There are two types of debt consolidation loans
This is when the debt consolidation loan is secured on an asset, this could be a car or your house for example. If it was your house, it will need to be mortgage free or if there is a mortgage you will need permission from your mortgage lender to have a 2nd charge placed against the home. In some cases your lender will allow you to consolidate your debts into your mortgage but this is likely to cost you more in total repayments than other options. If you fail to keep up your repayments, the lender can then repossess your assets and sell this to recoup the loan. Secured loans usually have better rates due to their less risky nature.
This is when the lender gives you a debt consolidation loan based on your credit file. There is no asset to back the loan and this loans are usually more expensive due to their higher interest rates. If you miss a repayment on this loan this could severely damage your credit score.
What you should consider when looking for a debt consolidation loan
Early repayment & other fees:
Your current different lenders might all have charges associated with transferring your debt elsewhere. You should ensure you have an idea of what these charges are and if you can afford them. You should also consider them when taking into considerations the savings you could generate from consolidating your debts.Some debt consolidation loans also require you to pay some fees when you take out a new debt consolidation loan.A good financial wellbeing platform will take all this into account when giving you options to consolidate your debt.
The interest rate being charged should provide you value as its total cost to you should be cheaper than all your current debts combined. If this isn't the case then you should reconsider a debt consolidation loan.
Your repayment term:
A shorter term can be a good idea but still cost you just as much as your previous loans combined and a longer term will usually cost you more as you pay interest on the debt over a longer period of time. You should consider this before settling on a debt consolidation loan.
The point of a debt consolidation is to make savings. Getting a debt consolidation loan with a monthly repayment which you can't afford is only going to put you in a worse financial situation. You should avoid doing this as a missed repayment on your credit file could seriously damper your chances.
Debt consolidation loans aren't the only cliche financial product in this space to accomplish the same outcome, You can simply get a personalised loan or a balance transfer credit card( even for 0%).
Getting in debt is bad, we know! A good financial wellbeing platform will do well to avoid you getting in debt m=by making sure your spending isnt over the roof and highlighting areas you should monitor carefully. And if you are already in debt, they will assist you in finding the best product to reduce your total costs and spend on interest rates.