Debt consolidation is the financial route chosen by many struggling borrowers as a solution to prevent them from drowning in debt. This is a popular option for debt management as it provides a simple way of merging a person’s debts into one place, though taking out yet another financial product can still be quite risky.
What is Debt Consolidation?
Debt consolidation is a way of linking all debts into one, so borrowers are only making one payment each month. Though this doesn’t actually reduce a debt amount as all existing debt must be repaid eventually, a person knowing exactly where their debts are – and perhaps reducing the number of monthly repayments needing to be made – can give them greater control over their finances.
Debt Consolidation Advice
Debt consolidation advice can be obtained by debt management companies or, preferably, from relevant charities and government debt consolidation organisations. As those seeking help will undoubtedly be having money issues, unlike commercial debt consolidation companies, charities and government-backed agencies give free debt consolidation advice. Such schemes offer professional and impartial guidance and can be relied upon to recommend the best debt consolidation service as they do not stand to profit from any advice they give.
Debt Consolidation Services
There are different debt consolidation services available to suit individual needs, though it is important that they are only considered by those who are sure they will be able to repay all their debts.
Debt Consolidation Loans
One common solution is for borrowers to acquire a debt consolidation program in the form of a loan. Debt consolidation loans are essentially one big loan which a person will take out to combine their existing debts, whether these debts are from banks, building societies, high street money lenders, peer to peer lenders, pawnbrokers or online lenders such as payday loan companies. They are often a type of secured debt consolidation, meaning the loan is secured against the borrower’s home – though unsecured debt consolidation loans are also popular. The best debt consolidation loans are without a doubt those which save borrowers money in terms of lowering regular repayments: a debt consolidation loan means only one interest rate so monthly payments from their bank accounts should theoretically be lower, saving people money they cannot afford to spend.
However with many debt consolidation loans, bad credit customers may not benefit from consolidating as interest rates can be extraordinarily high. Furthermore, these products are ultimately loans which will still need repaying, and could possibly lead to a bigger debt problem, and a worsening of the borrower’s credit rating if loan repayments are missed.
Debt Consolidation Plans
Another solution for debtors is for them to work out a debt consolidation plan with a debt company. Similar to debt management plans, debt consolidation plans require customers to make one large monthly payment to a company which will act in-between the lenders and the borrower. This company will then distribute the money to the required lenders, allowing borrowers to make one simple payment instead of losing track of how much they owe to each lender.
However, such a solution should only be adopted with great caution: these debt management companies often levy stiff charges for their services, which means that it can take much longer to pay off the debt. It is usually better to take advantage of many of the services available that offer free debt advice.
Credit Card Debt Consolidation
Those with credit cards can also consolidate any existing debt onto one credit card. Credit card debt consolidation can save borrowers money as many providers offer introductory interest free periods. Not everyone will be entitled to a debt consolidation credit card – for instance if they don’t have a history of good credit rating or have undergone bankruptcy – so customers with a poor financial past are advised to seek free debt advice for alternative financial routes.