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Is Debt Consolidation The Right Way To Manage Debt?

With the range of financial pressures increasing, the number of people who have gone into debt or further debt to ensure they make their monthly repayments has only increased, with some requesting debt advice fearing that they are in the process of going underwater.

There are several options available (1), some of which involve the courts, and each of them can be the right choice depending on your circumstances.

However, one option that is regularly advertised is debt consolidation, which involves merging all existing debts together into one single monthly repayment.

Unlike a debt management plan (2), however, this is not achieved through a collective agreement but instead by taking out a loan equalling the full amount of the debt and using that to make a full and early repayment. Because of this, it is sometimes known as a “consolidation loan”.

This does not lower the amount of money owed but instead moves it into the hands of a single creditor and a single interest rate determined by whether this new loan is secured against an asset such as your home or unsecured.

As a result, this can lead to fewer creditors chasing you and sometimes a cheaper monthly rate, as all these debts are paid and the remaining balance goes to paying off this new loan.

However, it is often important to be mindful that some types of debt incur early repayment charges, so it is important to factor those in when deciding how much to borrow, as it could theoretically increase your monthly repayments.

As well as this, the new lender will carry out a hard inquiry (3), which is a credit search that can affect your credit score, although if you are making regular repayments that hit to the score can quickly disappear. It does mean that certain consolidation loans are unavailable to people with bad credit.

Finally, because this is a large loan, the consequences for a missed payment can be particularly severe, up to and including losing your home if the loan is secured against it. Seeking independent financial advice is therefore essential.

If you are struggling with debt as a result of the cost of living challenges you can contact the Fresh Start UK team today.



Money Helper has replaced the Money Advice Service and brings together the support and services of three government-backed financial guidance providers: the Money Advice Service, the Pensions Advisory Service and Pension Wise.