Do you have concerns over debt repayments? If you have numerous credit card bills to deal with or have found yourself taking out high-interest loans to pay back other loans, the idea of consolidating your debt into one place can be an appealing one. But is it the right option for everyone?
Exploring the pros and cons of debt consolidation can help you make the right decision for your situation and feel more confident in managing your personal finances.
Day-to-day life can be expensive. And sometimes, managing those expenditures can feel challenging. Costs of moving house, running a car, and coping with unexpected bills can lead to mounting debt. You may find yourself taking out multiple loans to cover the costs and then struggle to keep up with the repayments — especially if they come with high interest rates.
If the prospect of paying back borrowed money and interest from multiple loans seems like a little overwhelming, you're not alone! But don't worry — thankfully, there are ways to manage your debt and get you back on track.
One option that some people may find helpful is debt consolidation.
Debt consolidation involves taking out a loan to pay off multiple credit card bills or other forms of debt. Essentially, if you find yourself struggling to keep up with repayments on different streams of debt, you can merge them into one loan to lower your monthly payments. Sounds ideal, right?
Well, for some people, debt consolidation could be a good solution. However, it may not be suitable for everyone — much of it depends on your individual circumstances, your credit score, and the kind of debt you're facing. Can you be sure you'll make the repayments every month?
Let's take a look at the pros and cons of debt consolidation so you can weigh up the benefits and drawbacks and come to a decision that makes the most financial sense for you.
Debt consolidation takes away the stress of multiple repayment due dates every month because you only have one payment going out. As such, there's less chance of late or missed repayments.
Plus, because the debt consolidation repayments are the same amount each month, it can help you budget effectively and know exactly how much to put aside. A fixed repayment schedule also means you can know exactly when your last payment will be.
Many debt consolidation companies charge lower interest rates than credit cards. However, interest rates can vary and can depend on your credit score. On the whole, though, if you have a good credit rating, you can expect to pay significantly lower interest rates on a debt consolidation loan than you might on a credit card.
A credit card's annual payment rate (APR) refers to the amount of interest you'll pay annually for borrowing. In the UK, the average credit card APR is around 25.3%. If you have numerous credit cards with high APR, consolidating your debt with one lender at a lower rate can save you a lot of money.
When applying for a debt consolidation loan, you'll have to go through a hard credit inquiry. Initially, this can lower your credit score. However, over time, debt consolidation may raise your credit rating as you're more likely to make repayments on time, proving reliability to lenders.
Your payment history is one of the biggest factors in calculating your credit rating. Paying your bills on time each month is a good way to build credit. Lenders or utility companies may report your arrears to Credit Rating Agencies, damaging your credit score.
The main drawback of a debt consolidation loan is that the slate won't be wiped clean. Ultimately, you still have to pay the money back, and there's no guarantee that you won't go into debt again.
It's worth looking at the root of the debt in the first place — have you been spending more than your income? If so, you may need to try changing your financial habits in order to avoid a debt cycle.
If you're concerned about making loan repayments and feel that you'd just end up owing more, just to a different lender, you might want to consider a different debt management plan.
Some debt consolidation loans come with fees that might not be immediately apparent. As with any financial contract, it's always best to check the fine print to make sure you understand the total cost. For example, are there late payment or early repayment fees?
Other potential costs include:
If you decide to take out a debt consolidation loan, you might find it beneficial to shop around and explore available options.
There's a chance your debt consolidation loan could actually come at a higher rate than your current debt. Again, this often hinges on your credit score. If your credit rating is quite low, you might find that debt consolidation companies charge you high interest.
If you've got multiple loans spread across different providers, you can take out a loan with Abound to help consolidate your debts. This not only helps simplify things but, depending on what APR you're paying elsewhere, can also reduce your monthly repayments. All you have to do to apply is for an Abound loan here.
We offer loans of £1,000 - £10,000 for up to three years.