Debt Consolidation Loan: Is It the Only Answer?

Have you found yourself financially over-committed? Don’t think you’re alone – far from it.

Nowadays it’s all too easy to find yourself over-stretched.

• You may have a student loan to repay before you even start.
• The high price of houses means that mortgage payments are increasingly hard to afford.
• You receive offers of new credit cards by almost every post.
• Almost every store you go into is anxious to give you a store card.
• Even your bank sends you tempting offers of loans to buy the new car or the luxury kitchen you’ve always wanted.

One day you suddenly wake up to the fact that you have too many commitments, mostly at very high interest rates. And your monthly income is no longer enough to cover it. Plus with so many different payments going out, it’s easy to miss one and end up in trouble.

What are your options? Is this where you go for a debt consolidation loan? Or are there alternatives?

• Credit card. One alternative to a debt consolidation loan is to roll all your debts on to one credit card. This does have the advantage that you only have one monthly payment to make instead of several. But your interest payment will be huge. You are not helping your overall financial situation by doing this. What’s more, there is the temptation to regard your debts as “out of sight, out of mind”, and start running up other debts on store cards, other credit cards, etc.
• Remortgage. If you have some equity in your home, a remortgage may be a good alternative to a debt consolidation loan. It will provide you with cash to pay off your debts and it will all be rolled into your mortgage payment, so you only have one monthly payment to make. If your current lender charges high interest rates, or is not keen to allow a remortgage, ask a broker to help you find another lender. You may well get a better rate. The only problem will be if you already have mortgage arrears. It will be more difficult, though not impossible, to find a lender with favourable rates.
• Bankruptcy. Some people are tempted to consider bankruptcy because it seems to offer an easier solution than a debt consolidation loan and apparently allows you to start again with a clean slate. However, you really must see this as a last resort. It can affect your credit rating for years to come and although it is more common nowadays, it still carries a stigma. If you really can’t pay off your debts, talk to a financial adviser or debt counsellor to see whether something less drastic, such as an IVA (Individual Voluntary Arrangement), may be more suitable for you.

You may still find a debt consolidation loan is the best way of managing your difficulties, especially if remortgaging is not an option for you. It does have advantages, such as putting you in control, helping you to budget, and reducing your monthly outgoings. But it does NOT cancel your debts! And not all loans will be right for you. Talk to an adviser or a broker to make sure you find a lender who won’t make you worse off than you were before.

Sean Horton is a Director of Loans Connection who offer debt consolidation loans