What debt consolidation is and why you should do it.

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“One major reason why our clients take out loans is to consolidate their multiple debts. One of the meanings of the word ‘consolidate’ is to take many things and combine them into a single thing. So in our situation, debt consolidation means to take out a debt to pay off your other debts. This means that you will only have one (often cheaper and flexible) repayment to make every month. Let’s explore how debt consolidation can simplify your life.

How debt consolidation works

Suppose that you have multiple credit card debts and small loans with different interest rates and monthly payments:

Loan Term (Years) Principle Interest(APR) Total Payment Total Interest Payment
Credit Card A 4 £3500 24.9% £5333.35 £1833.38
Payday Loan B 4 £2500 18.9% £3489.78 £989.78
Credit Card C 4 £1500 12% £1874.42 £374.42
Total Payment: £3197.58
Consolidated Loan 4 £7500 7% £8584.78 £1084.78

Instead of trying to pay these very high interest debts individually, you can have them combined into a more manageable and even cheaper monthly payment.

For example, if you consolidate these loans into a £7500 loan with 7% APR and pay them off in 4 years, you would have to pay £1084.78 in interest. However, if you tried to pay your loans off separately over the same time period, you would be paying a total of 3197.58 in interest. With a consolidated loan, you would save £2112.80.

There are two types of debt consolidation loans.

Secured – Where your loan is secured against an asset, usually your home.

Unsecured – where the loan isn’t secured against your home or other assets, this is the kind that we offer so your assets will be safe.

Borrowers who have multiple debts are often frightened by the prospect of taking out another major debt for the purposes of consolidation. However, used in the correct situations , it can help you save money in a variety of different ways.

It will simplify your repayments

When you are juggling various loans, it’s easy to lose track of your repayments. Every delayed or missed repayment severely damages your credit score, putting your assets at risk and increasing additional costs. Furthermore, the effects of this can last an entire lifetime, severely affecting your financial well-being and reputation.

It will help you pay your debts off quicker

If the consolidation incurs less interest than the individual loans, you can use the savings to make extra payments. This will help you pay your debts off quicker.

It could lower your interest rate

Paying off your high interest loans will inevitably increase your credit rating. When your credit score increases, you can take advantage of this by using the score to take out a cheaper loan to consolidate your existing high interest debts.  We recommend asking our brokers so that they can assist you with finding the most competitive rates. Sometimes your interest payments can be reduced from between 25% and 30% to 8% and even lower.

It could reduce your overall monthly payment
It is likely that your monthly payment will decrease over an extended loan term. This would make repayments easier over the course of a month. This is especially helpful if you are struggling with making monthly payments. Sometimes having a longer repayment period with a smaller monthly payment will give you the breathing space you need to get your finances in order.

It will increase your credit score, often drastically
Lenders like reliable borrowers who make an extra effort to pay off their loans. Debt consolidation combined with timely repayments will increase your overall credit score, securing your financial future and broadening future opportunities.

Debt consolidation can give you the leg room that you need to manoeuvre your finances into a more manageable position. If you’re juggling multiple payments with high interest payments, this is definitely an option you should consider. Speak to one of our experienced brokers to see what option is the best option for you.