The Best Way to Consolidate Debt?

The Best Way to Consolidate Debt?

Debt consolidation may seem like a good way to overcome debt in the short term.  The various methods of debt consolidation allow you to roll all your debt balances into one single amount.   But is this really a good way to go?

There are a few options to consider for debt consolidation and the best option for you will depend upon your particular circumstances.    Here are three popular forms of debt consolidation/repayment:

Personal Loan

Taking out a personal loan against all of your debt allows you consolidate a number of debts into one, sometimes at a lower rate of interest.   The benefits are that you can negotiate a personal loan at a rate of interest lower than what you are paying on some or all of your other debts.  An additional benefit is that you will know exactly what your repayment amount is every month – allowing you to be more certain about your budgeting and spending against your income.

Finding a personal loan that will actually save you money on interest payments may be a challenge though.  Sometimes the duration of personal loans (i.e. over many years) can really eat into the savings.  The longer you take to pay back the debt equals more money paid in interest.   The fees associated with any personal loan will need to be low so that you are not unnecessarily adding to your overall debt.   In addition, high levels of credit card debt and a bad track record of racking up the balances owed on your credit cards may make it difficult to get a personal loan from a reputable financial institution.

All in all, this option is a good one for people whose income is high enough to allow them to pay back the fixed repayment each month and, provided that the entire debt can be paid back in 3-5 years, this may save some money that would otherwise go on interest repayments.

A good option for people who want to pay off their debts, save money on interest and still preserve their credit rating.

Credit Card Consolidation

There are credit card companies that offer low-rate or even 0% interest if you transfer all your credit card debt to them.   This can save you money in interest payments over time and afford you some breathing space while you pay back the total debt.

Usually these low or zero rates are an introductory offer and only last for a prescribed length of time so you will want to make sure that you can pay back the total debt before the interest rate goes up.  Check to see that the fees associated with the new card are reasonable and won’t significantly add to your overall debt.

This is a good option for people who have more debt than they are comfortable with, but believe they can still manage to pay down the balance while the interest rate on the card is low.

Factors to weigh up in deciding whether this is the right option for you?  Your ability to pay more than the minimum monthly amount; the fees and charges associated with the transfer; your ability to pay off the total debt before the introductory offer reverts to a higher interest rate.

Debt Agreement

A debt agreement is an agreement between you and your creditors which sets out how much of your debts you will pay, to whom and by when.   This is an option for people who are struggling to pay back debt, even minimum monthly amounts.  This is also a good option for people who want the advice and help of a professional administrator to deal with creditors and provide some support for the duration of the debt agreement.

A professional administrator can negotiate on your behalf with your creditors to establish the terms of the debt agreement according to what you can afford to repay.  This means that you don’t have to do the negotiation yourself and sometimes the agreement can be negotiated so that you pay only a percentage of the total amount owed.
The benefits of a debt agreement are that you pay a single regular repayment (as per the terms of the agreement) and the interest on the debt is frozen.   This gives some certainty for the duration of the arrangement, saves money on interest and means that you no longer have to deal with debt collectors.

But – and there is a big BUT – entering into a debt agreement is an act of bankruptcy.   The debt agreement is listed on national registers that are publicly available; can appear against a person’s credit record for a seven-year period and can make it difficult for that person to obtain credit.

In addition, a debt administrator will charge you a fee, the amount of which will be added to your overall debt amount.

Still not sure?

If you are still not sure if debt consolidation is right for you, or you are uncertain about which option that is best for you, you can seek help from the professionals.

Settle Debt can provide you with advice about the best way to pay back debts, according to your circumstances,  and will help you to identify where you can make savings.  When you call Settle Debt, they will provide you with a free savings estimate designed to help you get your finances back on track.