Debt consolidation entails replacing a number of loans and or credit card debts with a new single loan with one monthly payment instead of several. This payment can often be lower as the repayments are usually spread over a longer period, giving the borrower more chance to manage and pay off their debts. It is especially useful for consolidating credit card debts which usually carry a very high interest rate.

How do I raise a new loan?

There are three ways:

• apply for an unsecured loan, for example from your bank
• remortgage
• take out a secured loan on your property.

Unsecured loans carry less risk of you losing your home if you default in repayment and they usually attract slightly higher interest rates than secured loans.

A remortgage will generally provide the most attractive interest rate but if you are tied into an existing mortgage with an early redemption penalty*, a secured loan could be taken out until the redemption period has expired and then the remortgage option can be pursued.

Of course, if your home is rented then you cannot raise money against it.

Debt consolidation of credit card debts

Credit cards usually carry the highest rate of interest for borrowing money. Paying off card debts by way of one unsecured loan with a lower interest rate will save money and make the debts more manageable. For example, you could have 3 or 4 credit cards with balances totaling £15,000 with an average interest rate of 19% but taking out one new unsecured loan at say 8% will save 11% interest on your credit card debt.

However it is vitally important that you stop using your credit cards to supplement your income and stop amassing credit card debts. To see what you can afford and how much you would save if you consolidated your debts, use our acclaimed budget planning forms here at www.debtwizard.com

The pros and cons of debt consolidation.

Pros