Are you struggling with debt? Four Ways A Debt Consolidation Loan Can Help

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UK private debt has risen by a staggering £ 63.7 billion since September 2020, with the average household reportedly in debt nearly £ 63,000 The money charity. While most people feel like they can get their finances in balance, many feel overwhelmed. Citizens Advice currently deals with nearly 2,000 debt problems every day. So it’s no wonder that many are looking for a way to get their finances under control. Here a debt consolidation loan could be the answer.

With a debt consolidation loan, you take out a larger loan to pay off all of your other debts, leaving you with only one manageable repayment each month. It is often used to simplify finances and get borrowers back on the road when they are struggling to keep their debts under control. Here are four ways they can help.

1. The fast path to debt-free

It can be easy to get into the habit of paying only the minimum monthly repayment on credit cards, usually just five percent of your outstanding balance. This means that it will usually take decades to balance the balance while charging a considerable amount of interest along the way. You also always have access to the remaining credit limit, so you run the risk of continuing to spend on the card and never actually reducing your debt.

Likewise, many people get so caught up in their disposition that sometimes, even after being paid, they never come out. In this situation, it can be hard to justify asking your bank to lower your overdraft limit if doing so causes you difficulty for the rest of the month. Additionally, most banks will charge a penalty and a higher interest rate if you accidentally exceed your agreed overdraft, making it a costly situation.

When you put your debts on one loan, you have a set end date in sight so you know exactly when you will become debt free. Provided you can meet the repayment schedule, knowing when your debt is being paid can be a great financial stress reliever.

The interest rate is usually much lower than a credit card, and spreading the repayments over time can make those payments lower and more manageable. However, there are usually fees for this type of loan and different providers charge different rates, so it is worth looking around.

To get an idea of ​​how much you might need to borrow and for how long, the experts at Kredit.de have a very useful one Debt Consolidation Calculator.

2. Handle only one repayment

If you manage multiple lines of credit, you will need to manage multiple repayment amounts and times, among other things. While this is often made easier by setting up a direct debit for the amount payable, you still need to make sure that you have enough funds in your bank account to cover every transaction.

This is where many get into trouble: either they don’t have enough money to pay all the direct debits they have set up, or they have so many repayments to make at different times that it’s easy to forget what you owe and where. The problem with missed or late payments is that there is a fee on top of the interest normally paid, which further increases the debt. Add to this the damage this does to your creditworthiness and it’s not hard to see why multiple repayments can soon become a serious problem.

A debt consolidation loan has the benefit of a set amount of monthly repayment at the same time until it is paid off. It is common for people to set up a direct debit so that this payment is automatically withdrawn from their bank account shortly after payday. So you can rest assured that you will be able to repay the right amount at the right time, month after month.

Another benefit of the one-time repayment is that daily life is easier to manage. Without having to keep track of that much, it should be a lot easier to see how much disposable income you have each month and a lot less stress on you and your finances in general.

3. Receive Potentially Lower Interest

Most debt consolidation loans fall under the umbrella of “homeowner” or “secured” loans, which means that your home is used as collateral for the amount you borrow. Because of this security, there is less risk for the lender, who will therefore be more likely to offer you lower interest rates.

This can be especially useful when your debt is spread over multiple lines of credit. Payday loans, overdrafts, and some credit cards in particular carry some of the highest interest rates. If you only have enough cash to pay back essentials on such loans and the interest rates are high, it can take decades before you can pay them off in full.

By getting a debt consolidation loan with a lower interest rate, you will find that a larger portion of the repayment amount actually reduces the debt, not the interest.

Remember that a debt consolidation loan is usually taken out for a longer period of time than an unsecured loan. While the interest rates can be lower, you could pay back more interest overall. However, this is often worthwhile if it makes everyday life much easier.

4. Improve your credit score over time

If you are struggling to manage your debt and you are prone to late payments or, worse, miss payments entirely, it could really hurt you credit-worthiness. Any missed or late payments will be noted on your credit report for six years. This means that even after you have paid off your debts, the effects can continue to affect you for years.

If you repeatedly fail to make your repayments, your lenders may take additional steps to get their money back. This could include legal action that you could take with a CCJ (County Court Judgment) or IVA (Individual Voluntary Arrangement).

These also remain in your credit report for six years, but can make it almost impossible to approve further credit lines. While it may be best to stop borrowing while you settle your debt, it can also affect much more mundane things, like renting a property and getting a cell phone contract.

Paying off your creditors and closing your accounts with a debt consolidation loan is a good first step in improving your credit score. Provided you can keep up with the repayments of your debt consolidation loan, you are showing lenders that you are a responsible borrower who can manage loans well, which can go a long way in improving your credit score.