DP Finance

Lending and finance blog.

Is it Worth Getting a Consolidation Loan?

A consolidation loan will allow you to bring together all of your debts into one easy to manage loan. Some people find that they are very useful, but others not so much. It is worth thinking about how they work so that you can consider whether they will be the right decision for you.

How does a consolidation loan work?

A consolidation loan will give you enough money to repay all of your outstanding debts and then allow you to repay them all in one loan. This can take away the hassle of remembering what you owe to who and allow you to manage it more easily in just the one loan. This sounds really good but you do need to be aware that there could be a problem with it. The interest on the loan could be a lot higher than you are paying on some or all of your current debts. It could be well worth adding up what you are paying in interest each month now and compare that to what you would pay on the loan. You might feel that it is well worth paying more because you will be able to manage your debt more easily, but you need be aware of the figures so that you can make that decision.

Would it benefit me?

As well as thinking about the cost of the loan, even if it is just a £1000 loan it is important to think about whether it will suit you. Although having just the one loan can sound really attractive and easy to manage, there are drawbacks. For example, if you used the loan to repay a credit card and overdraft, then you will still have that credit card and overdraft facility. As they are repaid you might be tempted to use them again. This will mean that you will be borrowing more money on top of your consolidation loan. This could end up with you getting lots more debt and being in trouble with not being able to afford the repayments.

We are all different though. If you know that this will not happen to you as you will have the self-discipline to not get any more debt until the loan is repaid then it should be fine. However, we never know when a financial emergency might be around the corner and that we might be tempted to use those loans that are available to us. Some of us will know that we are the sort of person that will take out the consolidation loan and then very quickly get into debt again. Some of us find it very difficult not to spend money and will do so if we have the chance. If you know that this is likely to be how you will behave then it could be sensible to leave your loans as they are as you will not have money available for you to spend. Then you will just have to try to repay each debt one at a time if you can. It can be difficult, if we are in the mindset that we like to spend money and feel that we deserve to buy ourselves things, to get out of debt. Getting some debt counselling might help someone who feels like this as it can be financially damaging. We can, of course, treat ourselves to some things once we are on top of our debt, but if we keep treating ourselves while we are still in debt then it can get really tricky.

Are there alternatives?

You may feel that a consolidation loan is too expensive or likely to cause you too many problems and so want an alternative. There are alternative solutions. It will mean that you will need to tackle the debts one at a time by yourself. You will need to come up with strategies on getting the extra money that you need to repay them. This might be from working extra so that you have a higher income or spending less, perhaps by comparing prices and buying cheaper things or by buying less. This can work well as you whittle down the debts one at a time and eventually become debt free. You will need to choose which debt to start with, it could be the one that has the highest interest costs or a small one so that you have the satisfaction of seeing the number of debts reduce. You will have to stick to the plan though and try to not start borrowing money again once they are all repaid.

This can feel like a more daunting task as you have more than one debt to tackle, but you will still have to repay the same amount of money. In fact, it might be cheaper to do it this way as consolidation loans could be dearer than the cost of your current debt. You might also be more motivated to stick to it when you know you have lots of debts to repay compared with just one. It can be very rewarding when you manage to repay one debt and it is gone and this could motivate you to work harder for the next one. When you have just one loan to keep slogging at this can feel like a huge task and it can be harder to find the motivation to repay it early. You will also only be repaying a very small percentage compared with a small loan where you will be paying back a bigger proportion.

How Can I get Out of a Cycle of Debt?

Once we get into a cycle of debt, then it may seem hard to get out of it. It could be that you are using a payday loan to repay a payday loan, go overdrawn at the end of every month or need to borrow money to cover you loan repayments. It is easy to get into a situation where it feels like there is no solution. There always is a way out though.

Seek professional advice

It can be wise to try to get some debt counselling. There are free debt counselling services and if you look online you should be able to find out how to contact one of these companies. They will be able to help you with anonymous advice to help you to get out of your problem. It may be that you are not happy talking to someone though and so you may rather try to sort out the problem yourself.

Look for ways to earn more

To start with it can be a good idea to see whether you can increase your oncome. This may not mean with regards to your specific job or to get job, although these are the more obvious solutions. Try to get more hours in your job, find a better paid job or try to get a pay rise. These seem simple but they are not always possible. You may also consider getting a second job, but again this can be tricky for some people.

There are other ways that you can earn more money though. You might be able to sell some things that you own, perhaps through a social media site, online auction site or car boot sale and this could raise some cash that could help you out. Even if it is just a small amount it can all add up, but just make sure that there selling fees are not dearer than the item(s) that you are selling.

You could consider doing some online work to earn money. There are all sorts of things that you can do from surveys to freelance work. Make sure that you read reviews of different sites so that you are sure that the method you have found is genuine and that you will get paid when you have completed the task. You should be able to find some money making forums, blogs and websites which have information about how to earn money online which will help you.

Reduce Spending

This is another area which can be tricky. You may feel that you are already spending as little as possible, but there may be ways that you can cut down even more.

It can be wise to split everything you spend into necessary and luxury. So, your utility bills, contracts, rent, loan repayments, food and transport to work would count as necessary items. Luxury items would be things like gifts, eating out, new gadgets, jewellery and accessories, holidays and things like that. You might be surprised how many things you buy would be considered to be luxuries.

Once you have done this, the first thing to do is to see whether you can reduce the cost of any of these items. This means by switching suppliers or retailers to get things cheaper. Comparing prices across lots of places can be done online and you might be surprised how much you might be able to save. Even if you think you shop in the very cheapest places you might be surprised when you compare prices that perhaps a pound shop is not a cheap as you thought when you find the same items for sale in other shops for less.

It might be that you will not have to go without luxury items for that long, just until you are on top of your debts and do not feel that your debts are getting worse and worse.

Keep a budget

It is really important to keep a track of your spending. You will then know exactly how much you will have to pay out and what you have left. If you know what you need to spend on luxuries and how much money you have coming in, then you will know what you have left to spend on other things. You can do this in a excel spreadsheet or just write it down. Note your monthly income and your monthly necessities and then you can see what is left. If you are struggling with debt then it is wise to spend all or some of what is left to repay some of that debt. If you do not have enough money to even cover the basics then you need to find a way of earning more money or downsizing so that you can manage your costs. Always stick to the budget and you should be able to stay on top of the debt.