What Is Debt Consolidation?

 

Debt consolidation brings a number of debts into a single new loan.

 

It may reduce the full amount that you have to pay. This may be a good option if you have a debt problem, but it can be risky.

 

Please note that Bright Oak is not a lender or a loan broker.

 

Home Owners

 

You may be able to clear your debts by securing them against your home.

 

This could be a remortgage. Your new larger mortgage clears the old mortgage and your other debts.

 

This could be a secured loan. This is a “second charge” mortgage secured against your property. It exists in addition to your main mortgage.

 

You may be able to reduce your regular bills. Interest rates on mortgages may be lower than for other debts. This is because the lender has greater security than unsecured lenders. The payment term may be long. This helps to reduce your repayments now.

 

Repaying over a long period means interest gets added for longer. The total repaid may be higher, even with a low rate of interest.

 

Without a careful budget, your unsecured debts could grow again.

 

If you cannot repay your mortgage or secured loan, you may lose your home. Your risks increase with larger debts secured on your home.

 

Unsecured Consolidation Loan

 

You may be able to get an unsecured consolidation loan. This can be used to clear your other debts.

 

With a good credit rating, your bank may be able to help with this. The interest rate and cost may be good.

 

Without a good credit rating, other lenders may be able to help. The interest rate and cost may be higher.

 

This option can work if you reduce your total regular credit bills. This will help if the new payment is affordable and you budget well.

 

A lower payment isn't helpful if it isn't affordable. You will find that your other debts grow again. This will make things worse in the long-term. It would be better to get debt advice instead.

 

A consolidation loan may run for a long time. Even with a lower interest rate, you may pay a higher amount in the end.

 

Balance Transfer Credit Cards

 

Many adverts for “balance transfer credit cards” exist. Lenders tempt new borrowers with zero or low interest rates.

 

This could be a good way to repay other debts with higher interest rates. It may help if you work hard to clear this new debt before the “deal” ends. You may save money and reduce your total debt.

 

It doesn't work out like this for everyone. They pay a fee for the balance transfer, increasing their overall debt. They’re tempted to use the card for a purchase, so interest gets added. The payment increases, so they use other credit. The total debt begins to increase again.

 

Balance transfer credit cards can be great. People who budget can make them work well. If you are slightly more chaotic with money, they can make things worse in the long-term.

 

Debt Solutions

 

Debt solutions (like a debt management plan) bring debts into a single payment. This may be appeal if you juggle many credit accounts.

 

Debt solutions are a last resort. They help when it becomes hard to help yourself.

 

Should you try consolidating rather than getting debt advice? We suggest you speak with a debt adviser first. They can tell you if consolidation will make things better or worse.

 

Summary

 

Debt consolidation can be rational and helpful. It can also cause worse money problems in the future.

 

Debt advisers are trained to assess what you can afford. They can tell you whether your plan is affordable. They can alert you to risks.

 

For direct help, contact our advice team today.

 

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