How Does Debt Consolidation Clear My Debt?
What are the benefits?
There are different ways of consolidating your debts that can allow you to:
- Make just one payment per month
- Arrange affordable payments you’re confident you can make
- Stop ‘juggling’ multiple debts and multiple lenders
- Know exactly how much your debt will cost you every month
Staying on top of your finances can be difficult – particularly if you’re juggling multiple debts. Unless you make every payment on time, you could face mounting fees and damage your credit rating, which could affect your chances of getting credit in the future.
Managing your debts can be time-consuming and stressful, but debt consolidation can make it much simpler. Consolidating your debts can also cut the cost of your monthly repayments.
However, agreeing to repay your debts over a longer period of time may increase the overall cost, as you’ll be repaying interest over a longer period too.
If you live in Ireland and you’re carrying various unsecured debts, Debt Advisory Centre Ireland offer debt consolidation services.
How can I consolidate my debts?
Different people will need to consider different ways of consolidating their debts. A quick look at three of them:
Debt consolidation loan
If you have store cards, credit cards and hire purchase (HP) agreements, keeping track of your debts can be difficult. Taking out a debt consolidation loan could simplify multiple monthly bills into one affordable monthly payment, by letting you repay your debts in one go, leaving you with a single loan to repay.
A debt consolidation loan can allow you to:
- Make just one payment every month
- Take advantage of a lower interest rate (in some cases)
- Know exactly what you owe
- Know exactly when you’ll have repaid all your debts
However, along with a possible increase in the overall cost due to the longer repayment period, taking out a debt consolidation loan can allow you to run up more new debts as you’ve paid off your existing credit cards, store cards, etc. – meaning you may end up worse off than when you first consolidated your debts.
But if you feel you have the willpower and can resist temptation, consolidating your debts can give you the crucial opportunity to cut up your credit cards and cancel any overdraft facility you may have (if you believe that’s the best way forward).
Although it’s unlikely to be appropriate if you’re already in serious financial difficulty, a debt consolidation loan won’t damage your credit rating and can reduce your monthly outgoings and give you better control of your finances.
Debt consolidation mortgage
If you are a homeowner, you may be able to consolidate your debts by taking out a new mortgage big enough to pay off your unsecured debts and your original mortgage. Though you’d owe more to your mortgage lender, you’d repay your other debts, which means you’ll only have one monthly payment to make: your mortgage payment.
Simplifying your debts with a debt consolidation mortgage could significantly lower your monthly repayments, as you will be spreading your repayments out over a longer period of time.
But again, remember that arranging to repay a debt over a longer period can be significantly more costly, as the money will spend longer gathering interest.
And bear in mind that securing debts against your home can be risky: your property could end up being repossessed if you don’t keep up with your repayments.
Debt management plan
If you can’t afford your agreed monthly payments, a debt management plan may be the best way of consolidating your debts. It’s an informal agreement between you and your unsecured lenders that works by reducing your monthly payments to an affordable level every month, until you’ve paid everything off. Remember that lenders don’t have to agree to a new repayment plan.
If you arrange a plan through a professional debt management company – and it’s accepted – you shouldn’t have to deal directly with your lenders yourself anymore.
As part of your debt management plan, your lenders may agree to freeze or reduce interest and other charges on your debts, meaning more of your payments go towards repaying your debt. This means the day you’re debt-free could come much sooner than if interest was still accruing on your debts.
However, it’s important to remember that repaying your debt over a longer period may increase the overall cost, as interest will have longer to build up too (unless your lenders agree to freeze interest, of course).
Lenders will also expect you to pay as much as you can each month, which will leave you with enough money to cover your essential costs – but little more.
And finally, making those smaller payments can impact on your credit rating if your lenders tell the Irish Credit Bureau (ICB) that you haven’t stuck to your original repayment agreements.