Spiralling debts from credit cards, pay day lenders and heavy interest bank loans can easily derail your financial status and the consequences of missed repayments can be intimidating and stressful for thousands of vulnerable borrowers across the UK. Figures published at the start of 2019 have revealed that UK household debts have risen by two-fifths in just six months. The report from Aviva’s Family Finances has shown that the average debt is now £13,520 – an increase of £4,000 from £9,520 in summer 2018.
The figure – which doesn’t include mortgage debt – revealed the average amount owed is 24 per cent higher than in winter 2011 when the data was first recorded.
Whilst taking out a loan is extremely common, the burden of mounting debts can not only affect your spending ability by taking a substantial wedge out of your monthly budget, it can also affect your credit score with a low credit score indicating you’re a riskier borrower than someone with a better credit score. Future creditors and lenders could make you pay for this risk by a charging you a higher interest on future loans.
With debt affecting so many families across the UK, years of austerity and wage stagnation, the ability to manage debt properly has become increasingly important. A whole raft of debt management techniques have emerged helping millions lumbered with small and larger debts, short term and long term.
What is debt consolidation and how does it work?
Consolidating debt is a method used by many who have more than one loan to manage. If you have a car loan hanging over you, store card debts and other personal loans to handle, this method lets you bring all your debts into one single debt meaning there is only one monthly repayment to make. Many people prefer this method of consolidating several different loans making it easier for them to keep track of debts and manage cashflow when making repayments.
A primary motivating factor for debt
consolidation is often to reduce the size of the monthly repayments, but it’s
important to calculate how much is already being paid each month on existing loans.
If the revised consolidated payment is higher, it may not be worth making the
switch despite the single payment being easier to manage.
Using debt consolidation may also allow you to take advantage of lower interest rates, moving high interest loans into one single lower rate plan but this will again depend on an individual’s credit score and some more attractive rates might not be available to all who apply.
There are several other factors to consider as well. A single loan repayment might be lower per month than the existing total but should the repayments be spread over a longer period, the total amount you end up owing may well be higher. Those contemplating a debt consolidation loan should also be wary of upfront or hidden fees which could also ramp up the final amount owed.
Another factor is the two types of loans which are available. With a secure loan, the lender uses an asset such as your car or property acting as collateral for the loan. Should repayments not be met, your personal possessions could be seized and in extreme cases, you could lose their home. An unsecured consolidation loan is not backed by assets but may have a higher interest rate compared to a secure loan and they are harder to acquire.
Of course debt consolidation plans do not suit everyone’s individual’s needs and other options are available including a debt management plan allowing you to repay your debts at an affordable rate. Other solutions include a Debt Relief Order or Individual Voluntary Arrangement which assist people who are unable to meet repayments on their debt and require legal protection from their creditors.
Seeking advice from financial professionals is an important first step in helping you manage your debt. They will advise you on what options are available to you, as well as information on how to budget in the future to avoid falling back into debt, and equally importantly how to improve your credit history if mounting debt has forced you to miss payments in the past.