How Debt Consolidation Works

In a recent post, UK personal debt, we looked at why UK debt had fallen for the first time since records began. Nevertheless, personal debt is still over £1.45 billion. Within this debt are many overburdened with debt from a variety of sources from personal loans to credit cards and store cards. Debt consolidation is a way to integrate all loans into a single payment. There are pros and cons to these schemes. It may be suitable for people in certain situations. But, it is good to get impartial advice before undertaking such a scheme. Unfortunately, financial literacy in the UK is often quite poor. I feel personal finance would make an excellent subject to be taught at school.

Owing money to several organisations can be confusing and worrying. It isn’t always easy to juggle the repayments so people think of Debt Consolidation as one of the solutions. Debt consolidation is putting all your debts with one company – the consolidator pays off your other debts and you owe the consolidator the total debt.

Technical Words and Terms

• If you owe money you are a Debtor – you have debts to pay
• You owe money to your Creditors.
• In the eyes of the lender you are the opposite to them, you owe them money so they see you as their debtor and the debt you owe them as an asset.
• Interest is the money you pay to owe someone else as if you have their cash they don’t have the cash and can’t use it.
• Charges are extra costs you may be asked to pay.
• Exit penalties are costs you may be asked to pay to change the deal you have.

Pros Of Debt Consolidation.

• There may be some comfort only having to answer to one creditor.
• The overall interest rate may be lower than the rates you are paying on other debts..
• You may be given longer to repay your debts.
• You may get hostile creditors off your back in exchange for new ones..
• You may be able to get an interest holiday on some credit cards.
• It may help you get new credit from a new supplier – if that is a good thing
• The debt consolidation deal may lead to a lower principle amount to pay back.

Con’s of Debt Consolidation

• You may pay more in interest in total over a longer period and at a higher rate of interest.
• There may be penalties from some lenders and you may also incur charges for the transfer. These can increase the overall cost significantly.
• You may need to provide security for the overall debt.
• One default may be chased more aggressively than if the debt remains spread over several lenders.
• Your credit rating may suffer if the debt is large.

Alternative to Consolidation

• Talk to the citizens advice bureaux and your creditors.
• Pay off the problem debts first – those who are close to legal action and those with high interest rates.
• If you have equity in a house consider extending your mortgage rather than a second mortgage to a consolidator.
• Look at a compromise with your creditors – some repayment may be better than none. Some may give you interest reductions or holidays depending on the reason for none payment.
• Ask for a salary advance and work it off
• Declaring Bankruptcy.
• Try avoid getting more debt particularly the wrong sort of debt. You do not see poor bankers and lenders only poor customers.

Consolidating debts at Direct Gov.uk