It's one of the key afflictions of the consumerist society we live in today: the banks and shops dangle credit cards, personal loans, store cards and higher purchase schemes in front of your face, with the promise that you can have anything you want right now and pay for it later – with little consideration as to whether you'll be able to afford it. Combined with the precarious position of our economy at the present time, you might find that you've quickly built up a vast array of payments, going off in all sorts of directions.
Furthermore, it’s easy to find that you've committed beyond your means. If every month you're struggling to see how you'll meet the next round, or if you've lost track of where all your payments are going and when, you might want to consider debt consolidation.
In short, this is where you move all of your separate debts into one single loan. Going down this route can sometimes mean you'll pay less money; it can also help you to avoid being pestered constantly by demands from a myriad of different creditors and allay the threat of bailiffs turning up at your front door. However, sometimes it will mean you end up paying considerably more over a longer period of time.
And as well as affecting how much you pay, the option you choose will impact upon how you manage your money and the financial footprint which follows you around.
DIY debt consolidation
The simplest way to consolidate your debts is simply by doing it yourself. Credit cards, store cards and overdrafts often come with astronomical rates of interest. If you don't think you will be able to pay these types of debt off in the short term, you can look into getting a new credit card with an interest free period on balance transfers and move all of the individual debts across. Some credit cards are offering periods of up to 18 months where no interest is applied.
If you can't get a new credit card, a personal loan could also dramatically reduce your interest. Adding the debts on to your mortgage, if you have one which isn't locked into a fixed deal, could be a cheaper option still.
Beyond the DIY option, things start to get a little more complex – and potentially costly.
Third party debt consolidation
If you've got yourself behind with payments on your debts and the banks are no longer willing to extend you a new line of credit, the DIY option might not be an available option for you.
Instead, you may have to seek a third party company to consolidate for you, paying off all of your individual creditors and leaving you with one single loan provided by the new company itself.
Unfortunately, though you'll still benefit from the ease of having one single payment and will avoid harassment from multiple angles, this option will more than likely cost you more. Your monthly payments could be more than they totalled before and they could go on for longer than you initially had planned for.
Warning!
Third party debt consolidators usually offer both secured and unsecured options. With the former, much like a mortgage, the loan will be linked to your property, meaning your home or business premises could be repossessed if you fail to keep up with your payments. Though this option will be cheaper, since the lender knows it can always recoup its cash, you need to be absolutely certain that you will be able to keep up the repayments in any eventuality. If you can't guarantee it, you could stand to lose a lot more than you could potentially gain.
Although your credit rating will likely have taken a pretty serious hit already, it isn't likely to suffer any more as a result off this type of debt consolidation.
Debt management and Individual Voluntary Arrangement
With a debt management plan, a third party company will make a proposal to the companies you owe money to and ask them to settle for a reduced amount. The creditors will quite often accept the proposals if they believe it to be their best option for recouping any money at all. Most of the companies which offer this service will charge you a fee for doing so and some will take a cut for themselves out of each regular payment. However, there are charity organisations out there which offer services for free. This option is likely to be significantly detrimental to your credit rating but will make the light at the end of the tunnel a little bit brighter.
Similarly, an Individual Voluntary Arrangement (IVA), available to those with unsecured debts of more than £15,000, will see you pay regular payments over a set period of time, with the remaining debt written off at the end. How much you pay and how long you pay it for will have to be agreed by a licensed insolvency practitioner and the majority of your creditors, with the particulars based upon your expendable income and what you can afford. Once again, this will have a negative affect on your credit rating but it will be preferable to bankruptcy.
One to avoid
A relatively new development in the debt market is companies that say they can eradicate your debt completely by offering you advice and documentation which you then present to your creditors. The common consensus is that these are a con. The authorities and the banks have stressed that there really is no magic bullet for solving your debt woes – it sounds too good to be true, and it more than likely is.
If you need help assessing your debts and working out the best option for you, the National Debtline is a charity which offers independent advice. Call them on 0808 808 4000.
Click here to check the latest rates on personal loans from Britain's leading lenders.
Author: KYM Editor
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