What is debt consolidation?

Debt consolidation occurs when people run into financial hardship or are trying to gain more favourable interest rates or lower repayments on existing debts. It consists of applying for a single loan to pay off a number of other debts. This can be beneficial as there will be only one repayment to a creditor as opposed to two or more and better interest rates can be granted as well as lower monthly repayments.

Debt consolidation can mean a number of unsecured loans or credit combined into another unsecured loan or credit agreement; however it is more often moved to a secured loan offset against the individual’s assets such as a property which serves as collateral. If the new credit agreement is secure then this often results in a lower interest rate than if unsecured as the lenders risks are lowered, however the assets will then become at risk if the repayment agreement is not adhered to.

When a person is paying off credit with high interest rates, for example across multiple credit cards, then debt consolidation could be a viable resolution. This is simply because credit cards and other similar forms of credit such as store cards hold a very high interest rate in comparison to a bank loan, whether secured or not.

Whether debt consolidation is a worthwhile exercise depends on each person individually. A total of a person’s expenditure per month for credit repayments should be calculated along with the amount of interest paid and repayments compared to the current availability and rates from an unsecured or secured bank loan.

If debts remain an increasing problem and a person is struggling with repayments altogether other options such as an IVA (Individual Voluntary Arrangement) or Debt Management Plan may be considered to help regain a positive financial position.