Debt Solutions – Forbes Advisor UK

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If you have debt in multiple locations, using a personal loan to consolidate your debt into one manageable monthly payment can be a convenient way to reduce the amount of interest you pay and help you pay off your debt faster.

We’ll take a close look to help you assess if this is right for you.

How to Consolidate Debt with a Personal Loan

Combining several types of debt – such as credit and store card balances, loans, overdrafts, and payday loans – into one monthly payment can make managing your finances easier and potentially save you a decent amount of money.

One way to do this is by using a personal loan. The amount received under the loan can be used to pay off the existing debt, and then you will return monthly payments to the new lender, ideally at a lower interest rate.

This means that you only need to make one payment every month, not several, and only deal with one lender.

What are personal loans?

Personal loans usually allow you to borrow between £ 1,000 and £ 15,000, although you can borrow up to £ 25,000 from some lenders. You will usually be able to repay this amount within one to five years, and some loans last a little longer.

Personal loans are not secured by collateral, which means they are not secured by assets like your home.

Secured loans, on the other hand, are secured by a pledge over your home, which means that in the event of a default, the lender can take action to return it to possession.

What are the pros and cons?

There are several advantages and disadvantages to using a personal loan for debt consolidation. This is important to understand before deciding if this tactic is right for you.

pros

  • You only make one payment per month to one lender, which makes managing your finances more manageable and easier.
  • You may be able to reduce the amount of interest you pay on your debt – rates are most competitive for loan amounts over £ 7,500.
  • Reducing the amount of interest will help you pay off debts faster
  • Monthly payments for an individual loan are fixed, which simplifies budgeting
  • You choose how long you need to repay the loan, usually up to five years.
  • Timely monthly payment can help improve your credit score.

Minuses

  • Not all lenders will allow you to use a personal loan for debt consolidation, so check before applying.
  • The most competitive personal loan rates are offered only to those with a good credit rating, so if yours is not up to par, you may be offered a higher rate.
  • Depending on the interest rate offered, the monthly payments may be higher than they were before.
  • The payments are not flexible, so if you miss a payment, your credit score may be affected.
  • The longer the loan term, the more interest you will pay
  • Organization fees may be required, as well as an early repayment fee if you want to repay your loan early.
  • If you repay them with a new personal loan, you may have to pay an early payment fee on one or more of your existing debts.

Things to Consider Before Submitting an Application

If you are looking to use a personal loan to consolidate your existing debt, it is important to assess whether it will actually save you money overall.

To do this, first check if you will have to pay any prepayment fees to pay off your original debts before the due date. If so, it could outweigh any savings you could get by taking out a personal loan.

Then figure out exactly how much you need to borrow (add up the total value of your current debt, including any prepayment fees), and estimate if you can borrow that amount.

You also need to think about how long you need to repay the borrowed amount – remember that if you choose a longer loan term, your monthly payments will be lower, but you will pay more in the form of accrued interest.

If it looks like you end up paying more for a personal loan than if you kept your debt where it is, or if you don’t think you can afford a new one-time monthly payment, a personal loan is unlikely. to be your best bet.

Likewise, if you are close enough to paying off your existing debts, consolidating them is unlikely to make financial sense.

However, if you are ready to go further, it is worth checking your credit rating before applying to get an idea of ​​how likely it is that you will be accepted for the best deals.

What are the alternatives?

While a personal loan can be a useful way to consolidate debt, there are several other options you might want to consider.

Credit card for balance transfer

If you have multiple credit cards or store cards in arrears, carry that debt over to balance of transfer card might be an easy way to deal with this.

If you choose a credit card with a zero balance, you will not have to pay interest on the debt for several months. This can save you a lot of money and help you pay off your debt faster.

However, keep in mind that most balance transfer cards will charge a fee of about 3% of the transfer amount, which will be added to your balance. And, if you don’t clear your balance during the 0% period, you will start paying interest.

Alternatively, some balance transfer credit cards come with a low APR for the entire duration of the debt, rather than 0% for a limited period. This means that there is no need to pay off the debt over a period of time – and some transfer cards with a low annual interest rate do not charge a transfer fee.

Just keep in mind that the credit limit on your credit card may not be enough to consolidate all of your debt, and the best deals are usually only offered to those with a good credit rating.

Credit card for money transfers

BUT credit card for money transfers allows you to transfer funds directly from your credit card to your bank account. You can then use these funds to pay off your existing debt – provided that the credit limit is high enough.

If you choose a credit card with 0% money transfer, you will not have to pay interest within the specified time. However, as with balance transfer cards, there is usually a transfer fee (often around 4% of the amount involved) and as soon as the 0% transaction is completed, interest is charged.

Secured loan

BUT secured loan usually allows you to borrow more than a personal loan (often £ 25,000 or more), and you can often repay it over a much longer period of time (up to 25 years). Interest rates can also be lower than for personal loans.

However, the big drawback is that secured loans are secured against your home’s collateral – which means that if you can’t handle your payments, you risk losing them. Therefore, they should only be considered if you have considered all other options and are confident that you will be able to pay the payments every month.

This type of secured loan is sometimes called a “second installment” mortgage because it is actually a separate loan in addition to the main mortgage loan.

This can be a useful option if you do not want to re-mortgage (see below) because it will incur the cost of early repayment of your existing mortgage.

Free capital from your home

Another option is re-mortgaging and freeing capital from your property – this is usually best done if your current mortgage transaction is nearing completion, otherwise you may have to pay a prepayment fee.

Provided that the value of your property – and therefore the amount of equity in your home – has increased, you can opt for a new, larger mortgage and use some of the equity to pay off other debts.

However, keep in mind that your mortgage will increase in size, so your monthly payments may also go up even if you get a mortgage with a lower interest rate.

What’s more, because you will be borrowing for a longer period of time compared to an individual loan or credit card, you will end up paying more interest.

Also keep in mind that as home prices fall, your home equity is likely to fall as well. This can potentially leave you in negative equity when your mortgage exceeds the value of your property.

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