Debt consolidation – how do you know if it’s right for you?

Creating the ‘perfect Christmas’ may have left many people starting 2020 with more debts than they can manage, and trying to keep up with multiple different payments can feel overwhelming.

What is debt consolidation?

Debts can build up from various different places, from credit cards and store cards to bank loans. Some people find that having multiple different debts can feel difficult to cope with.

Debt consolidation offers you the option of merging all of your debts into one loan. In principle, you borrow enough money to pay off all your current debts, so you owe money to just one lender rather than several.

There are two types of debt consolidation loan:

• Secured, sometimes referred to as a ‘homeowner loan’. This is where the amount you’ve borrowed is secured against an asset, typically your home.
• Unsecured. This is where the loan is not secured against your home or other assets.

Some people opt for a debt consolidation mortgage. This involves taking out a large enough mortgage to pay off an existing mortgage whilst also covering all existing debts.

What are the benefits?

There are a number of reasons why people choose consolidation.

• Firstly, it can reduce the number of outgoings into one single monthly payment. Many people find this easier to cope with than having multiple different payments.
• Debt consolidation can also help you spread the costs of repayment over a longer period of time. This can help to make paying it off more affordable.
• Plus, it usually has a cheaper rate of interest than other sources of debt.

 Is a debt consolidation mortgage right for you?

If you’re a homeowner and have built up equity in your property, then consolidating your debts by adding them on to your mortgage could be an option to help you better manage your finances. It may even open up the possibility of renegotiating an improved mortgage deal.

Many mortgage lenders offer free valuations, free legal fees, no product fees, and cashback elements if you switch your mortgage to them. However, finding the right one can be tricky, as the deals are not always available on the high street.

You should be aware that whilst debt consolidation means you will make short term savings, over the long term you may end up paying more. This is because you are likely to be extending the period over which the debt is repaid. You are also transferring previously unsecured debts to a mortgage, which is secured on your home and may put your home at risk if repayments are not maintained.

Get in touch

If you’re struggling to keep up with debt payments and have thought about consolidating your debts, but are unsure if it’s an option for you, please get in touch. George Square Financial Management’s expert team of mortgage advisers can assess your situation to see what options are available to you. We can also help you budget to avoid getting back into debt in the future.