GuidesDebt Consolidation Guide
SocietyOne's Debt Consolidation Guide
Everything you need to know about debt consolidation.
7 min read
What is debt consolidation?
Debt consolidation is the process of combining a number of different debts into one single loan that has an overall lower interest rate. It works well in a situation where you have multiple credit cards or unsecured loans, and can save you money in interest payments. By taking out a new personal loan to repay other debts, you can get a fresh term loan with a lower interest rate.
Why do people consolidate their debt?
There are a number of reasons why people consolidate their debt, including:
Simplify your monthly repayment schedule
Owing money to a number of different lenders can be overwhelming. If you are trying to pay off multiple debts at the same time, these will have varying interest rates and repayment dates, which can be confusing and hard to stay on top of. Consolidating the debts into one loan will mean there is just one repayment date and one interest charge, making it easier for you to keep track of your commitments.
Lower your interest rate
Taking out a new personal loan to cover your current debts will mean you obtain a lower interest rate on one loan, rather than varying interest rates from numerous sources.
Know when your debt will get paid off
Having a number of loans and credit cards with varying end dates can make you feel like you’ll never get out of debt. A new fixed term loan will mean you will know when the debt will be paid, making it easier for you to plan out your finances.
What types of debt can be consolidated?
There are a variety of different types of debt that can be consolidated, including:
- Credit card debts
- Medical bills
- Car loans
- Personal loans
- Unsecured personal loans
- Utility bills
Advantages & disadvantages
Moving your credit card balance to a lower interest rate personal loan can save you money, and offer a fixed payment schedule that makes it even easier to budget.
You may be charged an early exit fee from your current loans depending on your loan provider and loan terms. SocietyOne does not charge any exit fees or early repayment fees meaning you can pay off your loan early without any penalty.
Save on fees with one consolidated loan and have one regular repayment date.
Government duties and taxes may apply if you are using your home loan to consolidate your debts.
Having a single repayment date makes it less likely that you’ll miss a repayment. Overdue payments typically lead to a default, resulting in your credit score decreasing along with additional fees.
A single payment makes it easier to budget and making life simpler. You’ll spend less time doing maths and more time putting careful consideration into your monthly budgets.
Are you worried every time the phone rings? Consolidating your debts will stop debt collection agencies harassing you.
You may be able to avoid bankruptcy and avoid defaulting on your current debt by consolidating your debts into one personal loan, stopping your debt from spiralling further out of control.
Looking for a debt consolidation loan?
What to consider before consolidating
Is this the best option for me right now?
Taking out a debt consolidation loan is a decision that shouldn’t be taken lightly, and should offer you more benefits than the loans you currently have.
Will this loan save me money?
Make sure the debt consolidation loan you are taking out offers a lower interest rate, and check all fees and charges associated with it.
What are the fees and charges on this loan?
Don’t get caught out with high fees and charges from lenders. Loans available to those with bad credit often carry higher rates and fees, so be cautious.
Read the small print!
Ensure that you know exactly what you are getting into. Ask questions, read all of the necessary paperwork and understand what it means for you if you are declaring bankruptcy.
What methods can be used to consolidate debt?
Credit card balance transfers
Transferring your credit card balance from one credit card to a new credit card offers an easy way to consolidate debt and lower repayments, although there are some risks to be aware of.
Hire a debt settlement company that can help you negotiate your debt and create manageable monthly payments.
Home equity loans
Home equity loans can give you the money you need to pay off your current debts, and secure you a reasonable interest rate on the loan depending on the amount of equity in your home.
Steps to take to consolidate your debt
Create an inventory of your debts
Write a list of all of your outgoings so you can visualise your debt, how much you owe and to whom.
Review your loan options
Do some research on what loans are available and compare debt consolidation loans.
Calculate repayments and interest
Work out exactly how much you will owe each month and have a sound understanding of what the contract means for you.
Apply for your chosen loan
Whether it be a wedding, car, home improvements or even a dream holiday, having a good credit score provides you with far more flexibility when it comes to making large purchases, especially if you lack the initial funds to pay for something in full.
Understand your payment schedule
Ensure you have a good grip on when your payments are due. Missing payments will incur charges and lead to additional debt.
"These smaller, more attainable goals will give you confidence in your money management and help you feel accomplished every time you hit them."
SocietyOne CEO Mark Jones
Tips for getting the most out of consolidating
Between now and your debt settlement date, create some easy savings goals with quarterly checkpoints.
Track your spending
Take a snapshot of your outgoings. Seeing your income stacked against your expenses will help you to spot the holes in your pockets. Cut back where you can and save.
Get creative with your social calendar
Think of some enjoyable alternatives to an expensive night out, without compromising on the fun, such as game nights, taking turns to host a dinner at home or some DIY activities.
Share your goals
Tell your friends and family about your plans and goals. Not only will this help them understand what you’re facing and respond supportively, but knowing others are aware of your intentions can help cement your own belief in your actions.
Track your progress
Stay motivated by tracking your progress, and give yourself a little reward here and there.