How Debt Consolidation Works

What Is Debt Consolidation?

Borrowing money is a necessity for most of us, whether we are taking out a mortgage, paying for a car, household goods, clothes or other items by hire purchase or building up a balance on our credit cards. This is a fact of life, and borrowing is a perfectly sensible way to pay for the things we want, but it can become complicated.

Various debts will bear different interest rates and have to be paid off at different times, and keeping track of all the balances, Annual Percentage Rates, direct debits and so on is not easy.

This is where debt consolidation comes in. Essentially you are putting together all those separate debts to make one simple debt so that you only have to make a single payment and deal with one interest rate each month. Simplifying your finances with debt consolidation can make owing money so much less of a bother and it can reduce your monthly payments too.

How Do I Go About Getting Debt Consolidation?

There are several points to take into consideration when you have decided to go for a debt consolidation arrangement.

  • Work out exactly how much you owe in total. You might want to consolidate the whole sum or only a part of it. If you can cope with handling some of the debts separately it may be possible to work out a way to consolidate part of your total debt that gives you an advantageous interest rate.
  • Check out the interest rates. Loans are usually tiered, and generally the more you borrow the lower the interest you will have to pay. Therefore it might be worth borrowing more than you actually need in order to get a lower interest rate. If you do this with a partial consolidation loan you can use the extra money you borrowed to pay off one or more instalments of your other debts.
  • Does the lender levy a penalty charge for early repayment? If you want to pay off the loan in a short period, or even all at once, this extra cost may have to be factored into your calculations.
  • Remember that the longer you take to repay the loan the more interest you will have to pay.
  • Closing down all the old debts could have a beneficial effect on your credit rating. Several smaller debts being cleared may well count for more than one bigger debt being taken on.
  • If you want to transfer credit card debts, you should look for balance transfer credit cards offering a low interest rate for an introductory period. This will save you money in the short term, but you'll need to be sure that you can reduce the debt quickly once the introductory rate period is over. You may actually save money over the longer term by rolling those credit card balances into a debt consolidation loan then cutting up the credit cards.

While debt consolidation may be the answer to your financial hassles it is important to know all the pros and cons. Do some research and find a debt consolidation provider that works for you.  And remember, close down those old credit cards after consolidating your debt so that your overall debt position reduces each month!