Britain is a nation of borrowers with the latest figures showing that the average household has more than £11,000 outstanding in unsecured credit of one form or another: loans, credit cards, store cards, overdrafts and so on. If you are struggling with your finances, it’s worth remembering that many others are in the same boat and, as a result, there is plenty of help out there.
Multiple credit cards, an overdraft, unsecured loans… the payments on all of these can quickly rack up and threaten to overwhelm you. Once you’re on this merry go round, it can be hard to get off particularly if you are struggling to manage your household finances in the first place. If you only pay the minimum amount on your card accounts each month, you’ll barely make any inroads into the outstanding balance and find yourself at the mercy of sudden upward movements in interest rates. And once you start falling behind with your repayments, you could be faced with admin charges, default notices or worse.
Happily, there is a way to reduce the amount you are paying each month, cut the amount you owe in a sensible way over time and reign in the interest rates that you’re being charged on your credit cards. It’s called debt consolidation and is available to most people with a personal loan.
A personal loan is unsecured – meaning that you won’t have to offer your house as security or try to find a guarantor to guarantee the repayments. While the major high street banks tend to only offer personal loans to people with good credit records, there is a thriving market of alternative lenders who cater for people with credit records of every hue.
With a personal loan, you really do have a chance to sort out your finances by simply transferring all or a large part of your borrowing – other loans, overdrafts, credit cards, store cards etc. – onto one loan. Once you’ve done this, you’ll have just one monthly repayment to worry about and one interest rate to monitor and you’ll be able to focus on getting your finances sorted out. A personal loan gives you the ability to focus on repairing your household finances.
Once you’ve taken out a personal loan to consolidate your debts, you will be able to close the credit card and loan accounts, which you’ve previously struggled with. But before you do this, you should check that there are no early repayment penalties or other hidden fees that you might incur by settling other loans before your agreement term ends. If there are, you will need to take this into account when doing your calculations.
While a personal loan is unsecured, it isn’t a blank cheque to start spending recklessly. You will need to stick to the agreement and make all of your repayments on time to avoid extra fees, penalties and default charges. If you fall seriously behind with the repayments, the lender will still be able to take you to court to recover the money that you owe.
The upsides of a personal loan
If you are serious about sorting out your finances in 2016, taking out a personal loan to consolidate your debts is a sensible course of action provided that you can afford to make the monthly repayments and are confident that your circumstances will not change during the lifetime of the loan.
By rolling all of your outstanding balances onto one account, you’ll only have to keep an eye on a single interest rate and only have to make a single repayment each month. This will give you the flexibility to focus on your other outgoings and make the savings necessary to get your finances back under control.
You will be able to close the credit card and store accounts, which have caused you so much anxiety.
Settling loans and credit card accounts, which you may have fallen behind with will also improve your credit rating relatively quickly. Other lenders will want to see that there is no delinquency on your record and, so long as you make the repayments with your new personal loan on time, you should regain access to mainstream credit within a year or so.
The downsides of a personal loan
While there are now a huge number of lenders prepared to consider applicants with poor or impaired credit records, the interest rates and fees that they levy on personal loans can vary widely. Reading the small print, shopping around and talking to the lenders directly may be necessary to ensure that the interest rate you end up paying is not higher than the interest you were already paying on your credit cards and overdraft.
You should check whether any of the credit card accounts that you have been using were still on 0% introductory periods before paying them off and closing them. If any of them are, it might be worth leaving them as they are until you can afford to reduce them without taking on extra borrowing because you will almost certainly have to pay interest on the new amount.
How to choose a personal loan
Sit down and work out your total amount of outstanding debt, how much interest you are paying each month and how much you are reducing the capital by. When will you have paid off all of your debts? Can you afford to increase your repayments so that you clear these accounts sooner?
Now compare these figures with the personal loans that you have selected. Will you be paying a lower amount of interest? Will you pay off the loan sooner than you would be able to clear all of your debts? Is the monthly repayment affordable even if your personal circumstances change during the loan’s lifetime?
Of course, circumstances can also change for the better and it is worth checking to see whether there will be any penalties for paying off the loan earlier. If you are able to do this at some point, you will be reducing the total amount of interest that you have to pay.
There are lots of different loans to choose from if you are looking to consolidate debts, so always do plenty of research before applying for one to make sure you secure the best possible deal.
Article provided by Mike James, an independent writer operating in the financial sector alongside companies such as Solution Loans, a technology led finance broker who were consulted over the information contained in this piece.