Debt consolidation

If, after creating a budget, you have not been able to cut costs, are still having difficulty in meeting your debt repayments, but your situation is not so severe that you are contemplating bankruptcy, then you could consider consolidating all your debts into one new loan. These are referred to as debt consolidation loans.

Debt consolidation involves paying off all your existing debts with a new loan, which would cost you less each month than all the old debts put together. If your existing debts include credit and store cards, you should close your accounts so that you are not tempted to use the cards once the consolidation loan is in place. With a consolidation loan you have the same level of debt, but it becomes easier to repay. It's important to understand that. There is no debt reduction, just an easing of your cashflow.

Borrowing for consolidation can be either in the form of an unsecured loan, in which case the monthly payment is fixed for the term of the loan, or it can be secured against your home, which means that repayments generally move up or down in line with interest rate movements and your own mortgage arrangement. Unsecured borrowing is generally repayable over a shorter period of time than that secured against your home.

If you need to raise a really large sum of money to clear your debts, or if your credit history is poor, it may be necessary to arrange borrowing secured against your property in order to afford the lender added protection for the loan. Similarly, if you were after a low interest rate, a loan set against property would be the probable outcome.

Private and alternative loan consolidation