How Do I Consolidate My Debts

How Do I Consolidate My Debts - Advice and Information

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Definition Of Debt Consolidation

How Do I Consolidate My Debts?

We need to define debt consolidation first of all, because it can mean more than one thing. The consolidation part relates to the process of going from paying lots of different creditors to having only one single payment that covers all your debts. This is always the outcome when you consolidate your debts, but there are two different ways in which you can do it.

For some people, the term debt consolidation means taking out a loan and using it to pay off all your old debts, leaving you with only the new loan to repay, instead of lots of different debts. However, the term is also widely used to mean consolidation of debt through a debt management plan. These are payment plans set up by a debt management company, which also result in you making only a single payment into the plan instead of to all your creditors.

On this page I will therefore look at how to consolidate debts using both of these methods and consider the pros and cons of each option. If you already know which method you prefer, you can find out more about these on the debt consolidation loan page or the Debt Management page. Both pages include lists of recommended companies that can assist you.

How Do I Consolidate My Debts – Using A Loan

There is something inherently alarming about the idea that you should take on even more debt in order to try to get out of debt. That reaction is generally a sensible one, as it is far more likely that a new loan will not improve your situation in the long run. Having said that, there are some circumstances when a consolidation loan can be a good thing, and I will explain what they are.

Pros & Cons Of Debt Consolidation With Loans – The Cons

The potential problem with consolidation loans is that you can end up paying more than you would under your original debts if you are not careful how you go about it. One problem is that you may be attracted by a monthly payment that is lower than your debts currently cost you, but that is only half the picture. Unless you also factor in the length of time you will be paying off the loan for, you cannot know if you will be better off or worse. Some consolidation loans are for very long periods of time, which can mean that by the end of the loan you have paid out far more than it would have cost you to pay back your original debts.

A lender will probably be keen for you to take out a loan that is big enough to cover all your outstanding debts, but this is where you need to look closely at what you use the loan for. This is another area where some people come unstuck by using these loans inappropriately. A consolidation loan can be a good thing if the interest rate on the new loan is lower than the interest rate on your current debts. There is absolutely no point paying off a debt by borrowing money at a higher interest rate.

So when it comes to deciding which debts to consolidate and how much to borrow, you should look carefully at the interest rates of all your current debts, and only include in the loan those that are at a higher interest rate than that being offered for the consolidation loan.

Pros & Cons Of Debt Consolidation With Loans – The pros

One good thing about consolidating your debts through a loan is that you can include almost any debt you want, including secured loans. Other debt solutions, such as debt management plans (see below), only allow you to include unsecured forms of debt, so you cannot include mortgage arrears or other debts secured against assets.

Provided you carefully select the debts to include, and the new loan is at a lower interest rate, consolidation loans can be a useful thing, particularly if you have secured debts you want to pay off.

If you do consolidate debts in this way you still get the main benefits of the process, which are the simplicity of only having to make a single payment and the fact that your monthly payment amount is less than you were paying for your debts.

To find out more about how to consolidate debts with loans, including a list of recommended lenders, visit the main Debt Consolidation page of this website.

How Do I Consolidate My Debts – Using A Debt Management Plan

Debt Management Plans are probably the most widely used and successful system for tackling serious consumer debt. These payment plans are set up by Debt Management Companies, who negotiate with your creditors on your behalf to set up new arrangements for the repayment of your debts. Under these plans you stop paying your creditors and the debt management company sets about working out new terms that will reduce your payment amounts.

The cumulative effect of these negotiations is that interest is usually reduced or frozen and other charges are often reduced or waived altogether. These changes mean that all your creditors receive less money each month. You just make one payment to the debt company and they then have to make all the required payments to all your creditors.

Pros & Cons Of Debt Consolidation Using Debt Management – The Pros

The process is very much simpler and therefore easier for you to keep on top of. Having only one payment to make each month makes it far less likely that you will miss any payments.

Your monthly payment amount will be more affordable than your debts were, so you can get back to living more normally.

The debt company will deal with your creditors, so you no longer get chased by them for your debts.

A good debt management company will often provide additional help and support as part of the programme, such as advice on budgeting and managing your money.

Pros & Cons Of Debt Consolidation Using Debt Management – The Cons

Debt Management Plans are informal agreements, so your creditors cannot be forced to take part.

A plan is only viable if you have a steady income that leaves you enough money to cover the monthly payment.

You can only include unsecured debts, such as credit cards and personal loans, so you cannot include secured debts such as your mortgage.

How Do I Consolidate My Debts – What Next?

Hopefully the above information has given you an outline of the two main ways you can consolidate your debts. In general, a debt management plan is far more likely to be appropriate than a loan, but you now have enough information to decide that for yourself. If you go to a good company, some will offer both loans and debt management plans, so they can assess your situation and advise which is more appropriate.

The most important next step is to choose a good company to help you out of debt. This is very important as using a second rate company can leave you in a worse situation than when you started. Whether you want a loan or debt management help, you should shop around for the best value. You can do this very easily online by applying to a few different companies before deciding which offers to accept.

You can find lists of reputable and effective companies on the following pages of this site:

Recommended Debt Management Companies

Recommended Lenders for Debt Consolidation Loans

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The Pros And Cons Of Debt Consolidation