The Ultimate Guide to Debt Consolidation

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Managing your different monthly outgoings is part and parcel of running a busy household.

It’s not uncommon to have a number of debts from several different providers. From credit cards to monthly loan repayments – you can find yourself juggling a variety at any given time.

Sometimes this can be stressful, especially when you’ve got loads of other important things to think about.

The good news is, there are a number of things you can do to make your life easier when it comes to managing your debts. One solution is debt consolidation, and at Shawbrook we could help you to consolidate your debts with a personal loan, but there are other methods of debt consolidation you should also consider which are outlined further in this guide.

So let’s get started...

 

What is debt consolidation?

Debt consolidation is a way in which you can combine some or all of your debts into one single monthly payment.

This enables you to make one payment per month, rather than several.

And it often makes it much easier to keep track of all your payments.

 

What debts can you consolidate?

Take a second to think of your household’s monthly outgoings. Off the top of your head, you can probably reel off a fairly long list.

It’s important to bear in mind that not all debts can be consolidated.

There are two types of debt:

  1. Unsecured debt
  2. Secured debt

 

Unsecured debt is debt that isn’t secured to any of your personal assets such as your home or car.

Secured debt on the other hand, is the opposite. Your debts are tied to an asset – which the lender has a right to repossess from you if you fail to make your repayments.

When it comes to debt consolidation, not all debts may be consolidated, and lenders will be able to advise you of which secured and unsecured debts you can consolidate.

Let’s look at unsecured debts and the most commons ones that can be consolidated.

Credit cards

When it comes to credit cards, if you don’t keep on top of your monthly payments – it can be easy to fall behind.

You might find that it’ll take you a number of months to pay off a decent chunk of your credit card balance, especially if the interest keeps building up.

Managing credit card debt is one thing, but if you have multiple debts on top of this – you could consolidate all or some of your collective payments into one large repayment. This effectively means you won’t need to worry about ‘treading water’ over the next few months.

 

Store cards

“Buy now, pay later” is a very tempting line used by retailers, we’ve all been there.

You see something in a shop window which you know is out of your current price range…but you also know that payday is just around the corner.

The incentive to open a store card account is enticing – but the interest rate can often be higher than what you might expect for a credit card. As a result, store card debt can soon build up if payments aren’t managed effectively.

 

Bank overdrafts

Much like credit card debt, if you fall into your overdraft it can sometimes be difficult to claw your way back out of it in a short period of time.

When you consider what you could owe in interest – the longer you’re sat in your overdraft, the more your debt will grow.

So, the sooner you can get out of it, the better (which applies to all debts).

 

Unsecured personal loans

When you take out a personal loan, you will agree the terms of the loan with your chosen lender. The terms include the interest rate at which you borrow the money, the period of time you have to pay it back over and the total to repay each month.

If you have other debts such as credit cards and a personal loan, you might find that it’s easier to absorb these debts into another personal loan for example.

Going down this route could mean that you’ll actually end up paying less interest than you would’ve been paying originally on all your other debts separately.

Be mindful that if you do choose a personal loan to consolidate your debts, it’s also possible that you could end up paying more in interest, so please read the terms and conditions carefully and shop around for rates before you make your final decision.

Ultimately, you should carefully weigh up your options before you take on more debt.

There are also other unsecured debts that can also be consolidated included in the table below:

Examples of debts that CAN be consolidated

  • Credit cards
  • Store cards
  • Bank overdrafts
  • Unsecured personal loans
  • Personal lines of credit
  • Medical bills
  • Utility bills
  • Phone bills

Examples of debts that CAN'T be consolidated

  • Mortgages
  • Home loans
  • Home equity lines of credit
  • Boat loans (marine finance)
  • Lawsuits

Things people do to manage debt

There are a few things you can do to help manage your debts.

However, each person/household is different – and some methods may suit your personal circumstances better than others.

If you are struggling to manage your debts and are in financial difficulty, we would recommend that you talk to a debt advisor so that you can weigh up all your options and they can provide you with the right kind of advice based on your current circumstances. There are also free financial advice services available that you can help you, like the National Debtline or the Debt Advice Foundation.

Likewise, if you are finding it hard to keep up repayments with a personal loan or other form of credit, speak to your provider as soon as possible so they can help you manage this appropriately.

Now that we’ve covered the basics, let’s look at how you can consolidate your debts.

1. Credit card balance transfer

Depending on how much debt you have, you could move some or all your existing balances onto a single credit card.

As well as potentially reducing your overall interest payments, this form of debt consolidation gives you the ability to house all of your debts into one monthly amount.

To do this, you need a balance transfer credit card. To give you an idea of how this could work, we’ll use the hypothetical scenario below.

According to The Money Charity, the average consumer credit per adult was recorded at £4,113 (August 2018).

So, let’s round this down to £4,000 – and imagine a person, who this month might currently have…

...a credit card debt of £1,000
...a store card debt of £500
...a remaining overdraft balance of £1,500
… remaining personal loan balance of £1,000
Total Credit: £4,000

Side note: This information is completely hypothetical and should not be taken as a factual reflection of how the average consumer credit per adult is distributed.

This person wants to use a balance transfer credit card to consolidate these debts.

According to Choose.co.uk – card providers typically set the maximum transfer limit at around £3,000.

This person wants to use a card with a £3,000 maximum transfer limit, that’s 0% for 29 months.

If they were to use this card transfer for:

  • The £1000 credit card debt
  • The £1000 personal loan repayment

…that’s £2000 to be repaid over 29 months, which works out at around £68.97 per month.

By paying this amount each month, you will be clear of this debt in 29 months. Bear in mind, if you do not keep on top of this, you would be at risk of extending the length of the debt and it could cost you more as you would have to pay interest once the interest free period expires.

It’s worth taking into account that this excludes any potential fees and charges from the balance transfer credit card provider. 

Pros of a credit card balance transfer

  • You could save money in interest
  • Payments can be easier to manage depending on your circumstances

     

     

Cons of a credit card balance transfer

  • Additional fees and charges
  • Usually a limited time interest free

2. Debt consolidation loan

Taking out an unsecured debt consolidation loan to cover all (or some) of your other outstanding debts is arguably the most common approach to debt consolidation.

A debt consolidation loan is a loan that’s taken out to pay off a number of debts. It essentially enables you to merge all or some of your exiting debts into one manageable monthly repayment.

By making one payment per month (as opposed to several), you could find that you end up paying less interest, spending less time doing admin tasks, and generally putting yourself at less risk of missing a repayment somewhere along the line.

To show you how this could work, let’s go back to the example shown above – with our hypothetical UK adult who wanted to consolidate their credit card and personal loan debt.

Side note: Again, this information is completely hypothetical and should not be taken as a factual reflection of how the average consumer credit per adult is distributed.

To consolidate these 2 debts, let’s say this person decides to go down the debt consolidation loan route and wants to get a quote for a debt consolidation loan with Shawbrook Bank.

Here’s how it might work, if they apply for a £2,000 loan at the representative APR of 13.9% across 2 years.

Representative Example  
Representative APR* 13.9%
Loan Amount £2,000
Loan Term 2 years (24 months)
Annual Interest Rate 13.9% p.a. (fixed)

Monthly Payment

£95.16

Total to repay

£2,283.94

*Note: All loans are subject to status. The APR you are offered could differ depending on the lender you choose to borrow from, their assessment of your financial circumstances and your chosen loan amount. Terms and conditions will also apply.

As you can see, this option is slightly more expensive than the interest free credit card as you have to pay interest on top of what you borrow if you take out a debt consolidation loan. This might not be the best option for you if you are eligible for interest free credit.

Pros of a debt consolidation loan

  • You could save money in interest
  • Payments may be easier to manage
  • You can choose a loan term that works for you
  • The money is within a few days once the loan has been approved

Cons of a debt consolidation loan

  • Your credit history must show that you can handle credit responsibly so if you haven’t in the past, you may not be able to get a loan.
  • You could end up paying more interest.

3. Home equity loan

A home equity loan is a type of secured loan.

Essentially, this is where you borrow against the equity in your home and use the loan to pay off your debts.

So how does this work? According the UK House Price Index (September 2018), the average value of a UK property is £249,408.

Let’s say for example, your house is valued at the average £250,000.

Let’s assume you’ve already paid off £100,000, with your mortgage making up the remaining £150,000.

In the case of a home equity loan, you’d be borrowing off the equity you own - £100,000.

This would be a lump sum repaid over an agreed period of time, usually at a fixed interest rate.

Pros of a home equity loan

  • You could save money in interest
  • Payments might be easier to manage

Cons of a home equity loan

  • You need to have sufficient equity in your home to cover your debts
  • It’s a secured loan – so if you fail to make repayments, your home could be repossessed

4. Debt management plan

A debt management plan is a program that helps you assemble your non-priority debts into one affordable payment.

What does qualify as 'non priority debt'?

  • Credit card debt
  • Store card debt
  • Bank overdrafts
  • Unsecured personal loans
  • Money borrowed from friends or family

What does not qualify as 'non priority debt'?

  • Court fines
  • TV license bills
  • Council tax bills
  • Utility bills
  • Secured loans (i.e. mortgage)

Essentially, you’ll work with a debt advice organisation to work out a debt management plan that works for you based on what non-priority debts you owe.

Usually, you’ll make your payment to them directly – and they will take responsibility for paying your creditors.

Pros of a debt management plan

  • Payments could be easier to manage
  • You will get debt advice and support to help you through the process

Cons of a debt management plan

  • There are some unsecured debts like utility bills that can’t be covered under a debt management plan
  • Your creditors don’t have to agree to your debt management plan – and are within their rights to request immediate repayment should they choose to do so

5. Arranging an overdraft

If you arrange an overdraft with a bank – you’ll be allowed to spend more than you currently have in your account. The best way to describe being ‘overdrawn’ is when you go to below ‘£0’ in your account. So, it’s basically an extension of credit beyond your existing bank balance.

An overdraft should only be used for short-term borrowing or emergencies.

You can arrange an extended overdraft with your bank if you feel like it would be of benefit in the short-term.

This isn’t a method of debt consolidation, as such. It’s just something people do to manage their debts if they end up over-spending in one particular month, for example.

Your bank won’t always agree to extend your current overdraft or arrange a new overdraft. However, if they do, it usually will be subject to interest rates and fees.

Pros to arranging an overdraft

  • Short term option to manage your debts
  • Usually straightforward to arrange with your existing bank, but depends on the bank’s lending policies and your financial circumstances

Cons to arranging an overdraft

  • Often there is an arrangement fee
  • By going into an overdraft, you’re getting into debt. This should never be treated as a long-term solution

If you think a debt consolidation loan might be right for you, you can apply for a quote to get your own personalised guaranteed rate for a debt consolidation loan from Shawbrook.

Apply for a personalised quote

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