When is the right time for debt consolidation?

We’ve all seen the adverts for debt consolidation loans, but when is the right time to consolidate all your debts into one payment? Can anybody do it?

Debt consolidation loan advantages

The advantages of a debt consolidation loan are clear. If you have lots of different debts in lots of different places, a debt consolidation loan pays them all off and leaves you with one monthly payment. That could make it easier to manage your money and you’ll only deal with one lender from now on – simple!

Another reason people like debt consolidation loans – they can lower their monthly payments. Say you have a credit card and two loans and you still have three years of payments on each of them – if you take out a debt consolidation loan over five years, spreading the payments over those additional two years could save you money every month. That can free up much-needed cash in your budget.

Don’t get too carried away though! Spreading a debt consolidation loan over a longer repayment term means you would pay interest for longer – and that can work out more expensive overall. Naturally, this should be considered before applying – if you’d like cheaper monthly payments and are happy to pay additional interest overall then a debt consolidation loan may be the most suitable option for you.

Who can get a debt consolidation loan?

People generally only get a debt consolidation loan for their unsecured debts – the debts that aren’t secured against property. These debts include credit cards, personal loans, overdrafts, store credit, catalogue credit, hire-purchase agreements, or any other money you borrowed but didn’t secure against your property.

If you wanted to secure all your debts against your property now, you could remortgage or take out a secured debt consolidation loan. However, while you could reduce your monthly payments, your home would naturally be at risk if you couldn’t make the repayments.

Similarly, even an unsecured debt consolidation loan is only really an option if you can demonstrate to the lender that you can comfortably make all the repayments. If your income is unreliable, or if you know your income is going to be cut in the near future (perhaps because you’re approaching retirement, or thinking of going self-employed), a debt consolidation loan may not be the best option.

As with any loan, you would be credit checked when you apply. Anyone who is already struggling to keep up with their unsecured debt repayments – perhaps even missing payments – shouldn’t really think about consolidating their debts, and if they do, they might find their application for a debt consolidation loan rejected. If you are falling behind on debt payments, it may be time to get debt advice and see if there’s a better way of tackling your debts.

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