Debt Consolidation

Debt consolidation is where you bring all your debts together under a single loan. Consolidating all your existing debts into one monthly payments is one way of regaining control and potentially saving money. However, debt consolidation is not the best solution for everyone and you may end up paying more in interest than multiple indivdual loans.

Debt consolidation occurs where a consumer takes out a loan or other credit agreement in order to pay off two or more existing debts.

A variety of credit products can be used including:

• an unsecured loan
  
• an advance from an existing mortgage provider secured against property but leaving the original mortgage intact
  
• a second charge mortgage (a loan secured on property, from a lender other than the existing mortgage provider, that leaves the first charge mortgage in place)
  
• a remortgage
  
• the transfer of balances to a credit card (including the use of credit card cheques to pay off non-credit card debts).

  A recent debt consolidation study carried out by OFT had the following key findings:

  • most borrowers do not shop around for credit for debt consolidation, although this can save money - two thirds of borrowers who consolidated debts obtained information from only one provider.
    • many borrowers, particularly those in financial distress, are unaware of other alternatives which are open to them, such as negotiating with creditors themselves or getting help from free debt counselling services.
      • borrowers do not, in the main, give due weight to factors such as the length of the term of the loan and the total cost of repayments when deciding whether debt consolidation makes financial sense for them.

        In addition to working out what they can afford, borrowers considering taking out a debt consolidation loan need to know:

        • what debt consolidation is and what the alternatives are
          
        • what the interest rate and APR is and whether it is variable
          
        • what the overall cost of the loan is
          
        • what the monthly repayments are
          
        • whether there are additional features which will change the rate at which the capital sum is paid back
          
        • what will happen if they miss a payment
          
        • what happens if they want to repay or refinance early
          
        • if the loan is secured on their home, the consequences of not keeping up with payments and what happens if they want to move.

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