In 2017 alone, debt management charity StepChange reported that there were an estimated 600,000 people struggling with problem debt. If you’ve found yourself among this vast number of people, debt consolidation can provide you with a wealth of benefits, including fewer repayments, a lower total monthly cost and savings on interest.
If you‘re considering debt consolidation as a path forward, here are our expert tips for debt consolidation, done right.
Debt management tips – Prior to searching for debt consolidation credit
- Begin by creating a list of your debts
The first step of debt management before searching for a debt consolidation credit product is to know how much you owe, how much you’re paying on your credit and the total that will be repaid at the end of the term.
Start by creating a list that looks like this…
Creditor Debt type Interest rate Total owed Term left
HSBC Personal loan 8.9% £11,236 36 Months
Lloyds Credit card 15% £3,000 N/A
- Reduce your outgoings by switching providers for insurance, utilities and service providers
A further step for redressing the balance of your debt management prior to debt consolidation is to reduce your outgoings is to review your insurance, utilities and service providers.
- Reduce the amount you owe through selling assets
If you own valuable assets that you don’t need, it may make sense to sell them to reduce the amount of new credit you require to repay your existing debt.
You can read our guide to selling your assets as a debt solution here.
- Create an income and expenditure sheet
The next step for creating a thorough debt management plan is to understand how much you can reasonably afford to repay each month after you’ve reduced your debt through selling assets and cutting out unnecessary expenses.
- Find out whether you can reclaim your bank charges
If you’re facing genuine financial hardship you may be eligible for a refund of your bank fees. You should start by writing a letter or email to your bank, being sure to keep a copy yourself. If your request is refused, you may want to make a complaint to the Financial Ombudsman.
- Use a credit reporting tool to access your credit history
The health of your credit score will directly affect what credit products are available to you for debt consolidation. So as a final debt management step, you should download a credit report before applying for so much as a single debt consolidation loan.
Debt management tips – Finding the right debt consolidation loan
- Research the market and look for low-interest debt consolidation products
Always use a comparison website to research potential debt consolidation loans. This will provide you with a full view of the market, although your credit record may restrict your options if you have a poor credit history.
It’s important that you understand what you may be approved for prior to applying, as numerous credit applications can put a dent in your credit history. Ultimately this may stop you from obtaining a debt consolidation loan at all.
Repaying a singular loan will also make your debt management far simpler.
- If you’re a homeowner, consider whether an equity release loan could be a possible debt management solution
Equity release loans offer some of the most competitive interest rates available. If your home has increased in value significantly since you purchased it, an equity release loan may be a viable debt management solution, although you should still research other debt consolidation products to compare interest rates.
- Carefully consider whether replacing unsecured lending with secured lending would put you at risk
A further consideration to the debt management tip above is whether you will be responsible with your debt management in the future. If you’re facing serious financial troubles, it may not be a wise move to secure a large amount of debt consolidation against your home.
- If part of your debts includes a car loan, tread carefully
If your vehicle is on hire purchase don’t immediately think that consolidating this debt is the best solution. If you’ve owned your vehicle (and kept up with its repayments) for more than half of its term, you may be able to simply hand the vehicle back to the finance company. This can free you from any negative equity, and you may be able to use a cheaper alternative (such as leasing).
- Contact your creditors and ask whether they can offer you a lower interest rate
Before deciding that debt consolidation is right for your needs, you should talk with those you owe money to, to see whether they could switch your product onto a lower interest rate. Just bear in mind that if they do run a credit application, this will register on your credit report. As this can affect your ability to get more credit, this tip won’t be suitable if you have a large number of creditors.
- Speak with your bank about debt consolidation if you owe money over numerous products
If you hold numerous products with one provider – for example, a credit card, loan and overdrafts with your bank – you should speak with that provider about what your options are. In the case we’ve just mentioned, a personal loan will almost always offer a better interest rate than those offered by your bank account and credit card.
- Always understand how much any extra fees and charges will amount to before taking out a debt consolidation loan
Along with your list of debts, you’ll also need to understand how much you’re paying month by month in interest and any extra fees (such as bank charges for going overdrawn, or charges for missed repayments).
- Consider whether it may make sense to improve your credit score prior to applying for debt consolidation
If you find that you have a poor credit score, you may want to take a few months before applying for debt consolidation to focus on improving it. The tools we’ve mentioned above will all provide helpful suggestions for working on your credit score.
- Before agreeing to debt consolidation, research alternative debt solutions
Debt consolidation may not be right for your circumstances, particularly if you have poor credit and are unable to apply for a new loan. Start with our debt solutions page.
- Until you’ve secured a debt consolidation loan, make sure you meet your repayment obligations
If you default on your credit products you greatly reduce the chance of being approved for a debt consolidation loan.
- Always seek professional debt expert advice before signing for new credit
Nothing can replace the value of expert debt advice, so this tip is simple – always ensure you speak with a trusted debt advisor before signing on the dotted line for debt consolidation.
Debt management tips – After your debt consolidation loan
- Decide on a plan for changing your spending habits in the future
Here’s a tough, but important, question to answer: are you spending more than your earning? If so, you’re among the majority, as most households have £900 more expenditure than income. If this applies to you, you’ll need to cut your outgoings if your debt management plan is going to work long after your debt consolidation.
So gain a good understanding of how much you’re spending on non-essentials and aim to cut them out or reduce them. These may include:
- Days out
- Magazine subscriptions
- TV subscriptions
- Gym memberships
- Remove or reduce your overdrafts after your debt consolidation
Overdrafts are an easy way to fall back into the trap of debt. If you’re including your overdrafts in your debt consolidation, make sure you either remove them completely, or reduce them to a reasonable level.
- Cut up your credit cards
If you feel unable to control your use of your credit cards after your debt consolidation, cut them up or consider closing them altogether.
National Debt Help provide expert debt management and debt consolidation advice. Talk with our team today about your debt management options. Call on 0808 156 7718.