If you are struggling with debt, studies show that you are most definitely not alone. The Money Advice Service (MAS) estimates that there are over 8 million people in the UK alone who are classed as ‘over-indebted’. This term, meaning someone whose debt repayments come close to exceeding their income is on the rise, and with 22% of UK adults having less than £100 in savings, it is a real problem.
Getting out of debt, sadly, is much easier than getting into it in the first place. So, while the standard debt clearing advice of ‘spend less, make more than the minimum payment’ is good, it’s hard to follow. For those who are over-indebted the secret to becoming debt-free may be taking out a loan.
Debt Consolidation; How a Loan Could Set You Free
It may seem counter-intuitive to take on more debt to solve your problem, but the right type of loan could very well make paying off your debts manageable, if not easy. For those not in the know, this means taking out a lump sum (usually in the form of a loan) to pay off credit cards, overdrafts, and any other individual debts. The result is that all your debt is brought together into one regular payment, which is usually taken every month.
The Benefits of Debt Consolidation
When people find themselves in unmanageable debt, it is very rarely made up of one large, lump sum. Instead, it tends to be made up of a myriad of smaller amounts on credit cards and in overdrafts, all of which have different interest rates and minimum payment requirements. As such, a debt consolidation loan has many benefits which include, but are not limited to;
One, the simple monthly payment, which makes budgeting easier. A known quantity of interest.A potentially lower overall interest rate.
Of course, there are downsides to consider. First and foremost, there is a chance you could end up paying a higher interest rate on your loan. Especially if you have bad credit, secondly, if you have a lot of debt, you might need to take out a large sum that far exceeds your combined individual debts. Finally, such loans can often have hidden fees or extras. When choosing a debt consolidation method, you should think carefully about your budget, current rate of interest, and your overall debt level as well as how quickly you can pay it back.
3 Types of Loan Which Can Help You Out of Debt
These three loan types are not the only options you have when it comes to consolidating and eliminating your debt, but they are the most common. They are favored because of the benefits they offer to people who have low, moderate, and high levels of debt.
1. Credit Card Balance Transfers
For those who have multiple credit cards, a balance transfer can consolidate debt and potentially save you money if you have enough space on one of your existing cards. With an average interest rate of 20.77% on UK credit cards, having a debt of this kind can cost you a lot in the long run. Transferring your credit card debts to the card which has the lowest rate of interest, or applying for a new credit card with a low balance transfer fee and interest rate, is a good option for people with less than £5,000 of debt.
2. Best For people with low-level debt
Pros: fewer monthly payments, potentially lower interest rates, you can pay back more or less depending on your income each month, no collateral needed.
Cons: potential fees on transferring your balance, may require you to apply for another credit card (which can damage your credit score).
3. Unsecured Personal Loans
An unsecured personal loan is another option for those who have debts that cannot be consolidated onto a credit card, or who lack space on their cards. Unsecured loans are loans that do not require high-value items as collateral. Companies like NowLoan offer personal loans of up to £5,000 (or £10,000 in some cases) to be paid back over a set period of time. The rate of interest on such loans varies, so take the time to make sure that you will actually be saving money by consolidating your debts in this manner. Nonetheless, if you have a few credit cards or overdrafts, these loans often offer a simpler and cheaper way to eliminate your debt.
Best For people with low to moderate debt
- Pros: no collateral required, one monthly payment, potentially lower interest rates.
- Cons: set payment is taken over a set period of time. Interest rates can vary.
Secured Personal Loans
Taking out a personal bank loan to consolidate debts can be a fantastic way to save money on interest rates, especially for those with moderate levels of debt, which are too high to consolidate on a credit card. Secured loans are loans that require the use of a high-value item (such as a car or your home) as collateral.
The usual limit on these kinds of loans is £50,000, but it can vary depending on the provider and your credit score and can go up to £100,000 in some cases. In the UK, the average interest on a loan of £5,000 is 8.04%, while the average interest on an investment of more than £10,000 is 3.04%. This makes them perfect for consolidating debts over £5,000.
Best For: people with moderate to high levels of debt.
- Pros: one monthly payment for all debts, potentially lower interest rates.
- Cons: interest rates and fees can vary, set payments made over a set period, collateral required.
Becoming Debt Free is Possible!
When you’re stuck in a rut and overwhelmed by debt, it can be hard to see the light at the end of the tunnel. However, there are lots of resources out there to help you. Debt consolidation is just one tool at your disposal, so consider all of your options carefully before making your choice. Some companies offer a way to simplify the repayment process and bring down your overall monthly outlay so long as you borrow responsibly.