If you’ve got a lot of small debts that you’re struggling to pay off, debt consolidation might be the answer for you and your situation to get control.
Debt consolidation means taking out a single loan and using it to pay off several smaller loans. While this might sound like you’re just swapping one problem for another, there are several benefits to putting all your debt into one, larger loan. Here are a few reasons why you might benefit from consolidating your debt.
Lower interest rates: Debt consolidation
A lot of small, unsecured finance options like hire purchase or credit cards attract extremely high interest rates, meaning a large proportion of any amount you repay is covering the interest you owe rather than repaying the balance of the loan. Not only does this make for high repayments, but you end up paying back far more than you borrowed. A debt consolidation loan can often be negotiated at a lower interest rate, on average, than most your smaller loans, meaning that it could save you money in the long run.
Longer payment terms
With a debt consolidation loan, you may be able to spread the term of the loan over a longer period, which will make your regular repayments lower. This can be beneficial if you’re struggling to cover the cost of all your current payments. Bear in mind, however, that the longer the loan lasts, the more interest you end up paying overall, so it’s important to make sure you strike a balance between affordability and paying the loan off within a reasonable amount of time.
Easier to budget
If you have many different small loans, they probably all have different payment frequencies and due dates, making them difficult to keep track of. A debt consolidation loan places all your debt into a single, regular loan payment, which you can set at a frequency that matches your income, such as weekly or fortnightly. By working out an affordable payment schedule with your lender, and having the loan automatically repaid from your bank account as soon as you receive your income, you’ll be far more likely to pay the debt off successfully.
It can help improve your credit history
Having multiple problem loans where you regularly miss payments can do a lot of damage to your credit score, which will then make future borrowing more difficult and expensive. By consolidating your debts into one easy-to-manage loan, and making sure you meet all your repayments, the process of repairing your credit history can begin.
A debt consolidation loan can be an excellent means of taking control of a messy and confusing debt situation, but it won’t help you if you continue to take on new debt. Therefore, you need to be prepared to commit to paying it off before you consider borrowing more money. Talk to your lender to find out whether a debt consolidation loan is right for you.