Leading money charity, The money charity stated in their report that the average household debt in the UK was £9,305. A debt consolidation loan involves placing different credit obligations, such as small unsecured loans, credit card debt, hire purchase agreements and personal overdrafts, under one roof. This means lower monthly repayments, a reduced rate of interest and a defined period of borrowing.
Debt Consolidation Loan Reduces Monthly Payments
Consolidating debt involves making a single monthly payment to either a secured or unsecured creditor. This can help in the following ways:
- Improved money management and household budgeting as there is less scope for error.
- Fewer charges are incurred for missed and late payments on personal debt.
- Spreading the repayments over a longer period helps to increase affordability which will ease money worries.
Consolidating Debt at a Lower Rate of Interest
Credit card debt, personal overdrafts and the majority of hire purchase agreements charge a high rate of interest. Compare the APR on different, active credit agreements to confirm this. A debt consolidation loan reduces monthly payments due to a combination of an extended term and a reduced rate of APR.
- It was stated in Credit Action report that the average rate of APR on credit card debt was 17.73%. The rate is an average of 32% APR on cash advances.
According to uSwitch.com, 2 million customers have been rejected for credit card balance transfer deals in the last 12 months. This has meant that £3.5 billion of credit card debt could not be transferred to an interest-free deal. A total of £535 million of interest payments were made due to this. A debt consolidation loan may be the only realistic way of clearing personal debt.
A Debt Consolidation Loan Has a Defined Term
Unlike a credit card, a debt consolidation loan has a defined term. This means that, provided the borrower maintains monthly payments for the duration of the agreement, the loan will be fully cleared. Making the minimum monthly payment on a credit card means that the balance won’t be cleared for well over 40 years. In practical terms, the only way a balance will ever be cleared is through debt consolidation.
A debt consolidation loan can reduce monthly payments and improve household budgeting. Whilst it can alleviate money worries, turning unsecured into secured debt is rarely the right move as it gives creditors collateral (property) in the event of default. Whilst unsecured loans may be marginally more expensive and have a reduced term, it remains the preferred option for those who wish to consolidate debt.