Should you consolidate your debts?

Should you consolidate your debts?
19 October 2010

CONSOLIDATING debt – when you take out a single, new loan to pay off several existing debts – can sometimes be a good way of taking control of your finances, but tread carefully as this isn’t always the best option.

Before deciding on consolidating your debts, find out what’s on offer and what the alternatives are. These might include trying to make new arrangements with existing lenders or checking that you’re making the best use of credit options you may already have, such as an overdraft facility, credit or store cards, a personal loan, extending your mortgage or borrowing money from relatives.

Used carefully, however, consolidating your loans can help to put you back in the driving seat of your finances. Advantages include paying a lower rate of interest (longer-term consolidation loans tend to be better value than short-term borrowing, so monthly payments are likely to be lower), knowing when you’ll finish paying off the debt, making just one single repayment each month and dealing with one lender.

There are disadvantages, too, though. If the loan is secured against your home, your property will be at risk of repossession if you can’t keep up your payments.

Debt consolidation also invariably leads to paying more overall and over a longer period. There are extra charges for setting up and repaying the new loan and all of your eggs will be in one basket. So, if you get into difficulties, it may be more difficult to come to a new arrangement with a single lender.

However, if you are struggling with unmanageable debts and have no choice but to consolidate, always shop around for the best deal.

Make sure you understand all the terms and conditions and that you can afford to keep up repayments. Check what the monthly repayments are, how much you’ll pay back in total, how long you’ll be making repayments for, whether or not the interest rate can change, and what happens if you miss a repayment. You might be charged a penalty and there are likely to be penalties, too, if you want to repay the loan early, so find out what these are.

Once you’ve arranged the loan, keep your finances under tight control. Cut up your credit cards and don’t let debts build up again. Be aware that the lender may put pressure on you to borrow more by extending the loan.

You’ll be encouraged to take out insurance with your loan. Do you really need this? If so, make sure you’re clear about the terms and that you’ll be able to claim on it if you need to.

Taking control of your finances is often daunting and, sometimes, the first step is the hardest in admitting you have a debt problem. Follow cashy’s simple steps and you will begin your journey towards becoming free of debt:

Know your dues

Sort out exactly what you owe and to whom. Put your debts in order of importance. The most important debts are known as ‘priority debts’ and they aren’t always the biggest ones. Priority debts include your mortgage and secured loans and are ones where serious action can be taken against you if you don’t pay what you owe. For example, you could lose your home, be disconnected from a service or even go to prison.

In this part of the world, if you default on your debt you could face a prison sentence. Even a bounced cheque could result in jail until you’re able to pay the amount back again. The slight upside is that once you’re able to repay the debt, the slate is wiped clean and your credit record is left unblemished.

Non-priority debts include overdrafts, store cards and money borrowed from family or friends. You can’t ignore these, but you don’t need to deal with them as a first priority.

Work out a budget

Work out a weekly or monthly budget to see what your income and expenses are. This process can also show you where you can save money. A budget will help you decide what you can reasonably afford to repay your creditors, so it’s important to be realistic.

Seek advice

Consult an expert on the best way forward to repay your debts and regain control of your finances. Try to put a time scale on clearing your debts, so that you have a specific target. You can then look at following a wealth creation strategy to help you build a secure financial future for you and your family.

Pic credit: Michelle Meiklejohn/ FreeDigitalPhotos.net

Are you taking steps to get debt-free? Share your tips with the cashy community by commenting below.

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Independent Financial Advisor
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