We are living in turbulent times. The last few months have damaged the UK economy and millions are now out of work. If not already, it seems likely the country will enter recession – putting more jobs at risk and more businesses in danger.
To weather this storm, we’ll need all the support we can get. If you have lenders contacting you regularly for money you simply do not have, then it makes sense to search for a solution – a way to get these creditors off your back so you can focus on other matters.
Fortunately, there are a range of options out there – and one of those is debt consolidation. However, there seems to be a lot of misinformation out there and differing opinions. To help you determine whether debt consolidation is right for you, we’ve explored some of the most common questions surrounding this debt solution:
Will it help or harm my credit score?
Some debt consolidation providers claim this loan can absolutely 100% improve your credit score. Other organisations state the opposite. The truth? It’s a little bit of both.
When you take out a debt consolidation loan, your credit score is likely to deteriorate as you’re increasing your credit utilisation ratio – a figure which indicates how much available credit you have left. Generally, it’s advised to keep this at around 30%. Therefore, if you have a £3,000 credit limit, a recommended credit utilisation ratio would be £900.
However, you’re using a debt consolidation loan to repay your lenders. This, once done, restores the ratio to the point it was before. Then, by making payments on time to the provider – and building up a history of responsible borrowing – your credit score should start to increase.
It’s perhaps for this reason that debt consolidation loans for bad credit are quite popular. Sometimes they are used by applicants to improve their credit scores.
Can it reduce my debts?
Although some debt solutions reduce or write off some of what you owe, this isn’t true with a consolidation loan. The value of your debts hasn’t changed but now you owe one creditor instead of several. Although you may wonder ‘what’s the point?’, this brings us onto one regularly reported benefit of debt consolidation:
Can it help my stress levels?
As anyone who owes money to multiple organisations will tell you, it can be very stressful – especially if they start making demands for repayment. Repeated phone calls and emails not only have a detrimental effect on mental health but they can take up a lot of time as well.
Just having one lender to manage changes all that. With only one organisation to repay, one interest rate to monitor, and one payment to make, your financial situation should be simplified massively.
Will it help me get on top of my debts?
To answer this question, we have to look at two different areas:
1. Is debt consolidation good value for you?
When searching for a debt consolidation loan, you’re looking for a product which has a good interest rate and will leave you paying less each month or less overall. Otherwise, the consolidation loan probably won’t benefit you.
2. Is your debt related to a wider problem?
It’s now time to investigate why debts have built up in the first place. Although we all accumulate debt – from student loans to credit cards and mortgages – it’s only when this becomes unmanageable that it becomes a problem.
Once you’ve resolved your debts through consolidation, you should ensure you don’t find yourself in that position again. For example, if regular spending on credit cards resulted in your debt, you may be advised to cut up these cards.
If council tax or high rent lead to money troubles, it may be best to look for alternative living arrangements.
This is just a question to think about – and the answer will be different for every person.
What happens if I can’t keep up with repayments?
Fundamentally, debt consolidation is similar to any type of loan in the sense that repayments must be made. If you can’t make these repayments, then debt consolidation probably isn’t the solution for you.
Missing payments on the loan could effectively put you back in the same position you were before – with phone calls from the lender and demands for repayment becoming common again. Eventually, defaulting on the loan could lead to legal action or even a petition to make you bankrupt.
Conclusion – when a debt consolidation loan is helpful
Similar to any financial solution, a debt consolidation loan will only be helpful depending on your circumstances. Generally speaking though, you may wish to consider this option if:
- You can make the monthly repayments
- You want to simplify your financial situation
- You want to avoid insolvency
- You can resolve all your debts with a consolidation loan
If you want to write off what you owe, or realistically have no money available to repay creditors, then you may wish to consider an alternative debt solution.
Otherwise, there’s no harm in enquiring – you could potentially repay your creditors by this time tomorrow.
This article was provided by Tom Chapman, content manager at Consolidation Express. A UK-based consolidation loan broker, the company – and its advisors – have a wealth of knowledge when it comes to this debt solution.