Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk
Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk

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Consolidating debt - the loan solution

Debt level example

The word, consolidation, is often used when the subject of loans are discussed – or when the general topic of debt is raised.

The main problem with the word, consolidation, is the lack of understanding about what it means in the loans market. If you are looking to compare loans to look for a consolidation loan then it’s important you’re clear on what you are trying to achieve – along with the advantages and disadvantages of doing so.

Consolidation refers to the combining of your current debts into one payment – rather than lots of different payments to different companies. This should not be confused with debt management – as a debt management plan is a completely different thing.

Using a loan to consolidate

As you can see the monthly payments vary – and also the length of time the debt is spread over varies. You can also see, and appreciate, that a lot of people simply pay minimum amounts on their credit cards and store cards which can often result in the debt level simply sitting at roughly the same amount for many years. 
Getting a consolidation loan will depend on many aspects if you will be approved or not – a lot will depend on how up to date the payments are on your existing credit – it’s very important to keep payments as up to date as possible. Assume someone with a good credit rating/score can get a loan for a reasonable APR in the 15% range. This level is achievable with some unsecured loan lenders (some are cheaper) and more than achievable for homeowners with secured loans (plenty of rates also cheaper). For this example we will assume a 15% APR.
Current debt = £8,100 at £287 per month (over a mixed term). New Loan = £8,100 at £225 per month (over 4 years).
Advantages of this loan: This loan is £62 per month cheaper than the current outgoings – that’s a total of £744 a year. A massive reduction. The loan is over 4 years – this is 1 year less than the car loan and you could argue that the credit cards would have just seen minimum payments over the next 4 years and the balance would not have moved very much.
Disadvantages of this loan: The unsecured loan, of £170 per month, has 3 years remaining and this new loan is 4 years long. Therefore this debt is being stretched longer – so this has to be considered.
Conclusion: They key aspect of a loan is getting one to achieve what you want to achieve. It is possible that a consolidation loan may see you pay back more interest than you would pay with the debt individually. However, if in the example above, your key objective is to reduce monthly payments and outgoings this consolidation loan achieves exactly that.

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