Struggling with debt? Four ways a debt consolidation loan can help you

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Personal debt in the UK has risen by £63.7bn since September 2020, with the average household owing almost £63,000 according to money charity. While most people think they can balance their finances, many feel overwhelmed, Citizens Advice currently deals with nearly 2,000 debt issues every day. So it’s no surprise that many are looking for a way to get their finances under control. This is where a debt consolidation loan could be the solution.

A debt consolidation loan involves taking out a larger loan to pay off all your other debts, leaving you with one more manageable repayment each month. It is often used to simplify finances and get borrowers back on track if they are struggling to get their debts under control. Here are four ways they can help you.

1. Accelerate your way to debt relief

It can be easy to get into the habit of only paying the minimum monthly repayment on credit cards, usually just five percent of the outstanding balance. This means that it will usually take decades to clear the balance, while being charged a considerable amount of interest along the way. You’ll also always have access to your remaining credit limit, leaving you at risk of continuing to spend on the card and never actually reducing what you owe.

Likewise, many people go so far in their overdraft that sometimes, even after they’ve been paid, they don’t make it out. In this situation, it can be hard to justify asking your bank to lower your overdraft limit if it leaves you struggling for the rest of the month. Also, if you accidentally go over your authorized overdraft limit, most banks charge a penalty and a higher interest rate, making it a costly situation.

Consolidating your debts into one loan means you’ll have a fixed end date in sight, so you’ll know exactly when you’ll be debt-free. Provided you can follow the repayment schedule, knowing when your debts will be paid off can be a huge financial stress reliever.

The interest rate charged is usually much lower than that of a credit card, and spreading out repayments over time can mean that these payments are lower and more manageable. However, there are usually fees associated with these types of loans and different providers charge different rates, so it pays to shop around.

To get an idea of ​​how much you might need to borrow and for how long, the experts at Ready.co.uk have a very useful debt consolidation calculator.

2. Process only one refund

If you manage multiple lines of credit, one of the things you will need to manage is multiple amounts and repayment periods. While this is often made easier by setting up a direct debit for the amount you need to pay, you still need to make sure you have enough funds in your bank account to cover each transaction.

This is where many run into problems: either they don’t have enough money to cover all the direct debits they have put in place, or they have so many repayments to make at different times that it it’s easy to forget what you owe where. The problem with missed or late payments is that they usually incur fees, on top of the interest you would usually pay, which further increases the debt. Add to that the damage it does to your credit score, and it’s not hard to see why multiple repayments can quickly become a serious problem.

A debt consolidation loan benefits from a single repayment, for a fixed amount, at the same time each month until it is repaid. It’s common for people to set up a direct debit to have this payment automatically taken from their bank account shortly after payday. This means they can be sure they can repay the right amount, at the right time, month after month.

Another advantage of having only one reimbursement is to make everyday life more manageable. Without having to keep track of so many things, it should be a lot easier to see how much disposable income you have each month, and a lot less stressful on you and your finances in general.

3. Potentially get lower interest rates

Most debt consolidation loans will fall under the umbrella of ‘homeowner’ or ‘secured’ loans, meaning your home will be used as collateral against the amount you are borrowing. Because of this security, there is less risk for the lender, who will therefore be more likely to offer you better interest rates.

This can be especially useful if your debt is spread over multiple lines of credit. In particular, payday loans, overdrafts and some credit cards carry some of the highest interest rates on the market. If you have just enough money to pay off the bare minimum on this type of credit, and the interest rates are high, it could take you decades to be able to fully pay them off.

By getting a debt consolidation loan with a lower interest rate, you will find that more of the repayment amount will go towards paying down the debt, rather than on interest.

Keep in mind that you usually take out a debt consolidation loan for a longer period than an unsecured loan. Although interest rates may be lower, you could pay more interest overall. However, it is often worth it if it makes everyday life much easier.

4. Improve your credit score over time

If you’re struggling to manage your debt and you’re likely to make late payments, or worse, miss your payments altogether, it could really hurt your credit score. Any missed or late payments will be recorded on your credit report for six years, which means that even if you’ve settled your debt for a long time, you could still suffer the effects for years.

Also, if you repeatedly fail to meet your repayments, you may find that your lenders take extra steps to get their money back. This could include legal action, which could land you with a CCJ (County Court Judgment) or IVA (Individual Voluntary Arrangement).

These will also remain on your credit report for six years, but can make it nearly impossible to approve new lines of credit. While it’s best not to borrow more money while you’re paying off debt, it could also affect much more mundane, day-to-day things, like renting a property and getting a phone contract. mobile.

Paying off your creditors and closing your accounts with them using a debt consolidation loan is a great first step towards improving your credit score. Then, provided you can keep track of your repayments on your debt consolidation loan, you will demonstrate to lenders that you are a responsible borrower who can handle credit well, which can go a long way to improving your credit score.

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