Benefits of debt consolidation

Debt consolidation loans are a method of combining your entire existing loans and debt obligations into one single, and usually, lower monthly payment. This should be considered where the debts have become unmanageable or the rates are high and you wish to benefit from a lower charge or a longer period to repay.

Over time, you may have entered into a number of different loan and credit card arrangements with different payment amounts and repayment terms. Many of the existing loans that you have could have high rates of interest - particularly store or credit cards which are not designed for longer, hard core borrowing.

As a result, you are juggling several monthly payment amounts so by taking these multiple commitments and replacing them with one loan for a single fixed period of time can provide you with a reduced and more manageable monthly instalment.

There are two basic options when looking at debt consolidation and the choice will usually be driven by the amount you owe and your personal circumstances. If you want to consolidate a large amount of debt and you own your own house, it may be possible to raise a loan where your house is used as security in the event that you default on payments. The advantage here is that the rate charged will usually be lower (currently around 10% APR) and the term can be longer (up to 20 years) - thus reducing the payments that need to be made. It is possible to raise funds on a second mortgage if there is sufficient equity in your house thus leaving your primary mortgage in place.

If the amount of consolidated debt is relatively smaller (less than £7,500), then a single unsecured loan is possible. Here, as there is no additional security available, the rate charged will be higher (currently around 15% APR) and the term for repayment shorter (typically 5 years or less).

Secured loans are more involved and can take up to two weeks to approve. Unsecured loans are subject to credit scoring and normal credit checks and can be approved within days. In either case, working out what could be best for you is more important than speed so think carefully about all the options and, if necessary, get some independent professional advice. Citizens Advice Bureau (local offices can be found at www.citizensadvice.org.uk) or any Licenced Insolvency Practitioner can provide information although the latter may charge.

Using a debt consolidation loan will have no impact on your credit rating provided you have not missed payments with other creditors or on your new loan.

The recent credit crunch has tightened the market for consolidation loans meaning that they may be harder to get if you have an adverse credit score or history. Act before your debt gets out of control to make sure that your credit history is kept in tact. Whilst there is so much uncertainty banks, it is, arguably, one of your most valuable assets as they will be looking for customers with good quality credit histories.