When it comes to money management, debt consolidation is one of those topics that can easily intimidate. While the idea is simple enough, the challenge of being approved for new credit and choosing the right credit product is where things quickly become complicated. This guide will walk you through each step, so you can make the choices that are right for your circumstances.
What is credit card debt consolidation?
In theory, debt consolidation is straightforward. It involves using a new line of credit – whether it be a personal loan, balance transfer card or secured loan – to repay multiple debts.
This effectively rolls all your various debts into a single monthly repayment which, ideally, benefits from a lower interest rate.
When you use the right credit product, credit card debt consolidation could net you significant savings and make your financial management easier.
Method one – Borrow against your home
If your property has risen in value since you purchased it and/or you’ve repaid a substantial sum on it you may be able to take out an equity release loan.
Pros – Equity release loans tend to offer significantly lower interest rates as compared to credit cards, the main reason for which is that the lender has something to balance the risk against.
Cons – To qualify for the lowest interest rate you’ll need to have reasonable credit. You also need to bear in mind that there would be serious consequences if you fall behind with your repayments and your home will be put at risk.
Method two – Use a personal loan
Personal loans are unsecured (e.g. they are not backed up with an asset – such as your home or vehicle).
These types of loans sit in the middle of equity release loans and credit cards in terms of their interest rates, and they tend to run for between 12 – 36 months, for amounts of between £1,000 and £12,000.
Pros – There is a huge variety of personal lenders to choose from, including high street banks, online lenders and credit unions. This competitive landscape can mean that you benefit from a good deal.
Cons – If you have anything less than a reasonable credit rating you may struggle to qualify for a personal loan, and if you are approved you’ll almost certainly pay a higher interest rate.
Method three – Use a balance transfer credit card
Balance transfer credit cards come in many forms, but the most effective for debt consolidation is one that offers a 0% interest rate on any transferred balance for 36 months. While some providers charge an immediate fee of between 1 – 3%, there are a limited number that will allow you to transfer your balance free from charge.
Pros – If you manage to repay the balance during the 36 months (or whatever the promotional period is) you would be able to avoid paying any interest at all.
Cons – You may not qualify for a balance transfer card with a limit high enough to cover all your debts.
Struggling to secure debt consolidation credit?
Due to the nature of debt consolidation and the borrower having multiple debts, many applicants have already reached a point where their options for new credit are incredibly limited.
If all three methods outlined above end in rejection, there will still be a solution out there for your circumstances. Individual Voluntary Arrangements are one such option, and they’re sky-rocketed in popularity in recent years, with 19,020 consumers choosing this form of debt management in the first quarter of 2019 alone.
IVAs are a form of insolvency. This debt solution runs for between five and six years (which timeframe of the two will depend on whether or not you own your own house). After the IVA is finished, any remaining debt is written-off.
Should you choose this debt plan, you’d work alongside a provider to calculate how much you could realistically afford to pay each month. This can instantly improve your financial circumstances, and it also means that your creditors would be unable to pursue you or take any further action against you.
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