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In these uncertain times, sometimes a major change in circumstances can also cause a sudden change in finances. More often though, unmanageable debt doesn’t appear overnight but rather creeps up over the course of time and numerous small financial errors accruing into one large problem.
When the repayments on numerous loans, store cards and credit cards start to become difficult to keep track of or to afford, the promise of a debt consolidation loan seems to make a lot of sense. For some, this offers the way to move a large collection of smaller debts, each with their own terms and repayment schedules, into one single debt. Where repayments are easier to keep track of and (hopefully) lower overall.
Don’t Continue to Borrow After Consolidation
An easy trap to fall in after consolidating your debts is to become complacent after having ‘sorted out’ your debt problems. Don’t be tempted to start casual spending again.
Consolidating a lot of small debts into a big one may make them more manageable, but it doesn’t make them go away. Never lose sight of the fact that the money still needs to be repaid. If consolidating left you with a lower cost of borrowing, you might be better off saving the difference or using it to repay your debt faster rather than allowing the extra available funds to create a false sense of security and let your guard down.
Keep the length of the consolidation loan in mind
While it’s true that a consolidation loan could well reduce the amount you’re paying monthly, this is often done by stretching your repayment period out over a longer period, so while you’re paying less every month, it’s taking longer to repay your debt. As a result, the overall cost of the loan might be higher than the collection of smaller, shorter-term credit facilities it replaced.
Depending on your own circumstances, this may not be the case and even if it is, stretching payments out may still be a better option.
Interest rates are important
The overall cost of any particular terms of credit is determined by the rate at which interest is charged on the outstanding balance and the length of time it will take to repay that credit (as well as any additional fees and charges).
Low-interest rates aren’t the whole story, the overall cost of the credit should be considered when borrowing.
For example, borrowing £10,000 at a rate of 6% for 5 years will see you repaying £11,600 in total in instalments of £193 per month. Stretch that over 10 years however and while the repayments at the same interest rate are down to £111 per month, leaving you paying £13,320 overall. Doubling the length of the loan doesn’t halve the repayment amount, because you end up paying around twice as much interest throughout the lifetime of the loan.
Consider your credit record
If you’re already struggling with your current credit arrangements, there’s a chance that you’ve already missed a few payments to some of your existing creditors. This will, of course, show up on your credit file and could potentially make taking out a consolidation loan more expensive because you won’t be able to get the best credit rates. The best rates are usually reserved for those with only the most spotless of credit histories.
What are the alternatives to Debt Consolidation?
There are a number of alternative options to help individuals struggling with problem debt. The right choice depends largely on the circumstances. For some, Individual Voluntary Arrangements (IVA) might be more suitable, for others a Debt Management Plan (DMP) might make more sense. Bankruptcy is also a viable solution in some cases. All have their various advantages and disadvantages.
Taking the decision to tackle your problem debts and to seek help in so doing is a step in the right direction. At Lines Henry, we have decades of experience helping businesses and individuals to face their financial challenges, to assess and advise the best solutions for each and to assist them in dealing with their problems once and for all.
We offer a free consultation and while few things in life are guaranteed, we’re sure that the simple act of speaking to us and starting on your journey towards the financial straight and narrow will offer instant relief from the stress and worry that’s likely been troubling you.
Speak to us, feel better.