Debt and Bill Consolidation - Beginner's Guide

Most people today have more than one debt, be it personal loans, credit cards, store cards, catalogues or car finance. While this in itself isn't a bad thing, it does mean that millions of pounds of interest on these debts is being paid by consumers each month when it really doesn't have to be. The way to drastically cut the interest you pay on your monthly bills is with debt consolidation - a process by which you lump all of your debts together and pay one simple bill each month. Debt consolidation is usually accomplished by taking out a substantial loan which adequately covers the total amount of your existing debts. When you are approved for the debt consolidation loan, the money you borrow is automatically used to pay your outstanding debts and you are left with one bill to pay each month - that of your new loan.

Lumping all of your debts into one large loan means you also only pay one interest charge and this in itself can save you hundreds of pounds each month (depending on the size of the debts you were originally paying).

In general there are two main ways of securing a debt consolidation loan and these are as a personal unsecured loan and as a secured loan which uses your home as security.

Getting an Unsecured Personal Loan for Debt Consolidation

This method of debt consolidation is normally used when the total balance of your outstanding debts comes to less than £15,000. If you owe anything above this then you may find it hard to be approved for an unsecured loan because of the risk of non-payment. Consolidating your debts in this manner allows you to pay a single monthly payment which is normally a lot lower than the sum of the bills you're currently paying i.e. credit cards, store cards etc.

The only drawback with this method of consolidating your debts is that you invariably end up paying for longer. This is because you still have the same amount of debt but your monthly payment is much lower - hence you can end up paying your debt consolidation loan for many more years than you want to. Saying this, it does free up money now when you need it, and it could be that you are able to pay more each month in the future to pay the loan off more quickly.

Getting a Secured Loan for Debt Consolidation

This avenue of debt consolidation is only available to home or property owners. Basically, you borrow the amount of money you need to pay off your outstanding debts and secure the loan on your house, or any other suitable property. Because your money lender has some form of security in the event of non-payment, you'll normally find that their interest rates are slightly lower and they are much more willing to lend you the amount you want.

The obvious drawback with this form of debt consolidation is that your home or property is at risk should you fail to make your loan repayments. It should also be noted that if you choose to sell your property before your loan is paid off then your money lender will expect your debt consolidation loan to be paid back in full from the proceeds of the sale. For this reason you need to ensure you have plenty of equity in your home before using it as security on a consolidation loan - just in case house prices plummet and you can't pay your outstanding mortgage and your loan balance when your house is sold.

If you have no intentions of selling your property though then this form of debt consolidation can free up a large chunk of money each month. There are numerous specialist debt consolidation companies on the internet and by using one of the comparison sites you can quickly find one that is offering a competitive interest rate and good terms and conditions.

Finding a Debt Consolidation Loan

As mentioned above, secured loans can be found easily on the internet however you should try to find customer reviews and feedback for the lenders you're interested in. With regards to unsecured debt consolidation loans, you can again use the comparison sites on the internet or if you prefer you can visit a selection of your high street banks and building societies. Occassionally, high street branches of the big names in banking offer exclusive offers to in-store customers and so it may be worth shopping around using your feet as well as your fingers!

In summary, debt consolidation is a great way of cutting your monthly bills and interest rates in the short term however you can often end up paying your debt for a much longer period of time if you fail to shop around for the best deals available.