Debt can be confusing, it can become very overwhelming when it gets too out of hand. However, debt is quite common, and if you are suffering from debt, then you are not alone. Millions of people have dealt with debt in their life and sometimes more than once. For some, it can get completely out of hand and end up reaching a level that cannot be managed. That’s why getting your way through debt consolidation could be the answer for you, and at Center 4 Debt Management we offer the best services to help you out.
In this guide, we explain exactly what debt consolidation is, your options, and whether you are a good candidate for consolidating your debts.
What Is Debt Consolidation?
Debt consolidation is basically putting all your different debts into just one loan. This gives you a lower interest rate and just one payment to deal with. When you take out a debt consolidation loan, you get rid of all the other loans, which get simplified into one payment. Get rid of multiple credit cars and personal loans or bills and all the separate interest that you are paying. You get a fresh repayment that is affordable, a new loan term, and a lower interest rate.
Unsecured Debt Consolidation Loans
An unsecured loan doesn’t use physical assets as security. Instead, they will often use cash flow as security. Unsecured debt loans are usually only used for debts that are under $100k. The process for approval is faster, but they are a bigger risk for lenders due to not having collateral for security. Unfortunately, because these loans are in the more high-risk category, they come with a higher interest rate.
Secured Loans For Debt Consolidation
A secured loan is when you borrow against any inventory, property, and accounts receivable referred to as assets. For this type of loan, you will face a longer approval time as all the security needs to come into consideration. In addition, documentation is required, such as proof of the assets and their worth. Now, this is where people become confused. The thought is that if you put forward a £20,000 vehicle as the security, then you can get a £20,000 loan. The amount you will get is not always one-to-one with the value of the asset you have put forward.
How Does Debt Consolidation Work?
It can seem complex to consolidate debt, but all you need to do is take your time, research your options and follow the correct procedure. This will ensure you are making the right decision for your financial state.
These are the steps for the debt consolidation loan process:
- An inventory of your debt will take place
- Your options will get reviewed
- The interest and payments will be calculated
- You will be advised on which option is better for you
- An application for the chosen debt will be submitted
- You will now simply follow the payment schedule and rules of the new loan.
Getting An Inventory Of Your Debts
You need to get an inventory of your debts done to better understand your finances and whether you should get a debt loan. It is important to add everything that you owe up and write this down individually with the subject of whom you owe to and how much is remaining and overdue. This is the first step towards a Debt Management Plan.
Reviewing Your Options
There are plenty of options out there when it comes to debt consolidation: Bankruptcy, Debt Relief Order (DRO), Individual Voluntary Arrangements (IVA), etc. It is important that you do in-depth research on the options available to you. Certain things will need to be taken into consideration, such as debt amount, your income, and your credit history. This will help weed out the options that are not suitable for your circumstances.
Work Out The Interest And Payments
Whichever method of debt consolidation you choose, you need to know what you owe in interest, fees, and payments each month. By getting an understanding of the obligations, you will be more prepared each month to meet the requirements and manage the debt better.
Choose The Best Way To Consolidate Debt
Once the inventory of your debt has been done, you can then look into the options and work out what you can afford to pay on your income and general expenses. Can you use your equity? You may not own a home. Can you take out a loan? Varies options will differ.
Apply For Your Chosen Consolidation Preference
A balance transfer is always an option, but you will be paying high application fees, and it takes a while for any consideration. Before applying to any debt consolidation option, please read the documentation they require. Having it all ready to go upon request makes the process quicker and easier. Research the fees and interest rates and add them to the expenses. Can you afford this option? Some creditors will break a little on the rules and sometimes agree on lower monthly payments and interest.
Keep Track Of Your Repayment Schedule
Debt consolidation isn’t easy to get so when you do get it, treat it right! If you were lucky to get credit after having debt you need to pay on time and the full amount. As you continue to pay in full on time your credit rating is going to improve. If you miss payments, it will affect your rating and lead to more debt with late fees that carry a high-interest rate.
Is Debt Consolidation For You?
It can be hard to find out whether a debt consideration loan is a solution that suits you. Debt consolidation is suitable if you have various debts that equal a large amount. However, if you only have small debts you can pay off within 12 months, then it would not be worth the fees and interest that come with a loan.
If your debt was from overspending and bad habits, consider evaluating your habits and working with a professional to get the finances under control. Getting a budget set up can help you avoid overspending while trying to get out of the debt problem. If you are still overspending or have bad financial habits, you risk another debt if they are not under control once they are consolidated.
Some companies will only loan to you at high interest especially if your credit score is badly damaged. If your credit score is still somewhat ok, then get onto it sooner rather than later when your credit score has declined too far for a low-interest rate loan. In order to get ahead with the new loan, you need to have a loan that has lower interest than what you are paying with your debts.
Even though you are in debt and considering solutions to get you out, you still need to be earning an income. With your income, you need to ensure that you are earning enough income to pay your expenses and repay your new loan safely.
Debt Consolidation Example
As you can see below, consolidating your debts into a loan can mean that you are gaining a lower interest rate with an overall lower amount to pay. Look at the huge difference in interest. When it comes to the debt, it often isn’t the amount that you owe that kills. It is the interest. It grows and grows along with the repayments and once you are behind, it gets worse from there.
|LOAN||CREDIT CARD||CONSOLIDATION LOAN|
|Current interest amount||28%||12%|
|Term||28 months||23 months|
|Interest amount||5441 .00||1820.00|
What Is Covered With Debt Consolidation?
|Personal loans||Most student loans|
|Credit cards||Utility bills|
|Car loans||Medical bills|
Why Aren’t Utility Bills Included?
A utility bill that is past due and you are still using that particular service you cannot include that bill in the consolidation. If the company has frozen your account or you have changed providers in rare cases, you can include these in the debt consolidation, but this is very hard to do.
If you have a utility bill that is passed overdue with a high amount, talk to your credit counsellor about it. In some cases, an agreement can be arranged. Many companies are happy to be paid by debt companies as it still means they will get what is owed to them.
Student loans are classed as unsecured debts. This means that they can get consolidated in a way, but they cannot be added to a debt management program with your other debts. Therefore, to consolidate your student loans, you need to go through the student loan consolidation program designed for student loan debts.
Fees Involved With Loan Consolidations
Unfortunately, debt consolidations loans will have fees involved. In fact, any debt consolidation option you go for will have some sort of charge included. There are various fees that come with consolidation loans, which is why it is important to read the terms and conditions. If you don’t understand the involved fees, you might end up getting yourself in more trouble with a new loan instead of solving the debt.
- Origination fee: A new loan will come with a 1-5% loan amount fee. This is to cover the administration fees of organizing the loan. Another term for this is the closing fee.
- Annual fee: An annual fee is a cost that gets paid annually. This fee will vary per company, and sometimes it can get waved upon a certain agreement the two parties have come to.
- Late fee: A late fee will apply to those who miss payments. The late fee costs can sometimes end up getting charged for every week or day the payment doesn’t get paid. This is where many people get themselves into trouble. The late fee grows and grows along with the other repayments still coming in.
- Early termination: Some lenders will actually charge you a fee if you can pay out your loan early. Quite often, the fee sits around 1% of the remaining loan amount, or sometimes it can just be a one-off fee. This fee igetscharged to try and get people to avoid paying out their loans earlier. The interest you are paying each time is far more important to them than you closing the account sooner rather than later.
- Interest charges: These charges will depend on what terms are set out in the loan agreement. These can vary greatly from lender to lender. The interest rate can also get determined by the type of loan you are applying for and your credit rating. The interest on your loan can reach up to 30%. It is important to get a good interest rate as this can get you further in debt if the interest is high.
Debt Consolidation Pros And Cons
Debt consolidating loans can be a great solution for lowering your repayments and getting rid of your debts faster with lower interest. There are, however, pros and cons to consolidation loans, and these need to be kept in mind when deciding if a debt consolidation loan is the right move for you.
|Streamline finances||Added costs|
|Lower interest rates||Raised interest rates|
|Improves credit score||More interest is paid overtime|
|Reduce monthly payments||May increase spending habits|
|Get out of debt faster|
Do You Qualify For The Best Loan For Debt Consolidation?
Borrowers need to have creditworthiness and a good income to qualify. You will be required to show documentation of your employment history, credit card documentation, and everything you wish to pay out.
- Personal documentation about your loans and what you owe
- Last three months of bank statements
- At least six months record of your employment
In order to qualify, you need to have the following
- Be over 18 years of age
- You are a permanent resident
- You have more than one debt
- Steady employment
- Debt long overdue
- The debts will take longer than 12 months to pay off
- You can prove you are struggling financially
Best Debt Consolidation Options
There are several ways to consolidate your debt. Here we show the common methods:
- Debt settlement
- Home refinancing
- Personal loans
- Home equity loans
- Credit card balance transfers
Credit Card Balance Transfers
You can consolidate your credit card debt via a credit card balance transfer. Balance transfers mean you can move your debt from your current credit card to a new one. Balance transfers are an easy way to get out of debt. You just need to choose a credit card that has a lower interest than what you already have now. There are some credit cards that deal with no interest at all for the first 6 to 12 months. If you were to go this way, you could try and pay off as much as you can while no interest is getting charged. If you have a credit card with high interest, like 30%, this can be hard to handle, and it can get out of control very fast.
If you own a home and have a good amount of equity in the home, this can be another option. A home equity loan can get redrawn to allow you access to the equity and use it to pay off your debts. Although home equity loans are pretty solid and safe, there are still drawbacks to this method. When you take out a home equity loan, you are actually putting your house in the danger zone of repossession if you happen to default on your payments. It is important that you work out whether you can pay the repayments or not before you go ahead and commit to the equity loan. There may also be fees involved for drawing your home equity out early.
Personal Loan Debt Consolidation
You can also consolidate debt by applying for a personal loan that is specially designed for debt consolidation. These particular personal loans offer you funds to eliminate the current debts you have, so you only have to deal with one payment each month with lower interest. The good thing about a debt consolidation loan is that you get given a timeframe as to when you will have the loan paid off. When you have a time frame, you can become organized, and it offers more hope that you will pay it off. A debt consolidation loan is only going to be good for you if you can manage to secure a rate that is lower than what you are paying now.
If you have a home loan, you might be familiar with refinancing. Refinancing a home can be used for debt consolidation but only if done properly, which can help lower your mortgage cost. There is a fee for redrawing and you will end up with higher mortgage payments and it can add a few more years onto your loan.
If after personal loans, balance transfers, and refinancing you are still left with a debt that is unmanageable, consider debt management.
While this might not be the ideal choice, if there is no other option, this should be the next step in line. Debt settlement means hiring a company that will contact your lenders and negotiate the debts to create an agreeable payment.
Tips For After You Get The Best Loans For Consolidation
Once you have the best deal, you need to ensure you are doing everything right. It isn’t just a matter of paying what you owe on a loan each month, but you also need to do several other things to ensure your finances stay under control.
Create A Plan
Invest in taking some time to create a consolidation plan so you can organize your new payments, and that outlines everything you need to know about your new solution.
Once you have consolidated your debts, it is important that you take a new approach to finances. Be disciplined and only buy what you need and save what you can. Make sure your loan is paid on time, and the full amount always gets paid. If you pay monthly, consider putting a certain amount away each week, so you have the right amount to pay.
If you have extra cash while saving, it is a good option you can also think about paying more off your loan. Making extra payments means you are going to pay the loan off quicker than planned. This is because each extra payment you make will reduce the interest amount that is paid on the whole loan.
Follow A Strict Budget
Once you have consolidated your debt, you don’t want to ruin that good feeling with another debt. Create a budget so you know exactly what has to be paid and when and how much money is leftover. Follow the budget to ensure you don’t end up in debt again. You might have to do it tough for a while but it will get the loan paid off.
Credit Scores And Debt Consolidation
A consolidation loan can help to improve your credit rating. Paying off as much of the loan as you can keep the interest low, which means more money is in your pocket. By doing this, you are boosting your credit rating and score, so you appear more appealing to creditors in the future.
Unfortunately, putting everything into one debt can also have a negative impact as this goes on your credit report as a debt loan. Credit scores prefer to have long-ongoing debts with consistent payment. Closing all of your old credit accounts then just going for one new credit account it can lower the amount of credit obtainable which will, in turn, raise your debt to credit ratio.
Borrowing And Repaying Calculator
Many companies offer an online calculator where you can put in the amount you owe and how long you want the loan for. This will bring up results that will show you what the new repayments could look like and how much you can gain access to.
This gives you a realistic view of what you are looking at for fees, interest rate, and what the repayments would look like on a certain amount of credit. There will be some differences in interest rates and fees with each individual credit lender. This is just for the sole purpose of getting an idea of what you can get.
Consider The Other Options
Before hiring a company for its debt consolidation services, consider the other options first. There might be something more suitable for your circumstances available to try.
Consider Switching Home Loans
First talk to the mortgage lender if you are having trouble paying the mortgage. Most lenders will have a program to help those who are struggling financially. Speak to the hardship team and see if they can offer you any assistance. Sometimes repayments can be paused or lowered.
All lenders have programs to help you in tough times. Ask to speak to their hardship team about hardship variation solutions. Sometimes they are willing to lower interest and even pause the repayments for a few months. What they offer will be different between lenders and the circumstances.
If you are paying high interest on the loan, consider changing the home loan to one that comes with lower fees and interest. Research as some companies will offer free interest for a certain amount of time or low repayments as motivation to choose them.
Speak With Credit Lenders
If you have loans or credit cards, consider talking to the lenders and see if you can extend the loan or make changes to the repayments.
Opt For A Credit Card Balance Transfer
A balance transfer is a simple way to lower the interest of your debt. Transfer your current amount to a new card that has a lower interest rate and fee.
Once a plan has been in place, you will need to decide whom you will pay first. Sometimes, the creditor will make this decision and choose who will be paid in what order. If you can choose, it is best to get rid of the debts that have the lowest interest. If you can only get enough consolidation for a few debts but are left with some still to pay yourself, get professional advice on how to manage these along with your new repayment.
Can Consolidation Express Help Me?
No matter what circumstances you are in, if you have debt, there are solutions. Your case will be looked over, and an individual plan put into place. You need a professional to work with you to find the best solution. There is help and advice out there from trained professionals that can assist. You are not alone.
Can I Make Additional Payments To My Loan?
Yes, you can. This is a good idea as it can help to get rid of the personal loan faster.
Do I Get The Money In My Account?
Most debt consolidation loans won’t actually give you the money in your account. This is to ensure it goes where it should, such as your debts. Some lenders will pay the debts for you.
Will Debt Consolidation Remove Or Reduce Your Original Debt?
One thing to keep a note of is that the debt consolidation liabilities will not remove the initial debt amount. Instead, the consolidated debt method switches your old debts to new debt in a simpler form and will make these multiple amounts into a total amount. For actual debt relief or those who do not meet the loan conditions, it is better to consider debt settlement rather than debt consolidation loans, or both.
The purpose of debt settlement is to reduce the obligations of consumers, not to reduce the number of creditors. Consumers cooperate with debt relief organizations or credit advisory services. These organizations do not issue actual loans but try to renegotiate the borrower’s current debt with creditors.
Can You Get A Debt Consolidation If You Have A Bad Credit Score?
The only way to get a debt consolidation with a bad credit score is to get a secured loan. As in this type of loan, the creditor holds your collateral or the papers of your property as a security, so your bad credit score is not a matter of concern then.
Can You Keep Your Credit Cards After Debt Consolidation?
You cannot keep your credit cards. Once they are paid, they are cancelled and closed.
What Risks Come With Consolidating Your Debt?
The biggest risk you face is damage to your credit score, losing collateral that you put up, and not getting low enough rates.
Can I Consolidate My Car Loan?
You can add the car loan in with the other debts that are being consolidated. Most times you can still keep the car as the lender is paid off in full. The car can get reprocessed if you do not pay the repayments to the debt consolidation company.
What If There Is A Default Payment To The Debt Consolidation Loan?
If you default on the loan it will affect your credit score, but unfortunately, it will be lasting damage. If the loan was secured by collateral, something will be seized to pay back the amount owed.
Should I Settle Or Pay In Full?
It is better to pay what you can in full. Settling the account can cause havoc on your credit file, a settled status is classed as a negative.
How Long Will Debt Consolidation Stay On Your Record?
When you settle a debt, it will stay on the record for seven years from the date they were paid off.
Can I Wipe My Credit Report Clean?
It is possible rare occasions to wipe bad credit from the file. The lenders can be contacted directly and see if an arrangement can be made for them to remove the items from your repot. Sometimes this can be done for a fee.