“My monthly payments are much lower than the loan I was offered.”
When people think of debt consolidation they tend to think of a loan. Unfortunately as a result of the credit crunch these loans have largely dried up and the interest rates charged on them have soared.
As a consolidation loan is no longer an option for most people, at Liberty we aim to highlight the alternatives and show that there are plenty of other ways to clear debt.
If you are struggling with high repayments and need to arrange an affordable solution then please browse our site to find out more information or complete our free debt test which will provide a tailored response.
A Debt Management Plan for example will often freeze interest completely and as such could be a quicker way of clearing debt than a loan. In fact an IVA could be an even quicker method as on average 58% of the existing debt is written off completely.
Of course an IVA is not suitable for everyone but at Liberty we want people to be ware of their options and avoid being pushed into a loan they cannot afford.
A debt consolidation loan could help some but it is not a way out of debt and actually results in more debt for most.
A recent survey showed that 60% of people that took out a consolidation loan went on to run up further debts.
Pros
- One monthly payment. This means an end to juggling payments and ‘robbing Peter to pay Paul’.
- Lower monthly payments than existing combined repayments. Payments should reduce significantly as the debt is restructured over a longer period.
- Lower interest rates (APR) than credit and store cards. Most store cards have a typical APR of 29.9% so despite recent rises a consolidation should result in a much lower interest rate.
- Protects your credit rating. A consolidation should not damage your credit rating and could actually improve it. Provided all payments are made on time it can improve your credit score and if a large loan is required in the future (e.g. a mortgage) then this can support your application.
Cons
- Lack of loans for those with bad credit rating or those on a reduced income. Since the credit crunch began in August 2007 banks have cut lending significantly and the huge sub prime sector has virtually disappeared. This means that for anyone without a perfect credit score it is hard to find a loan and the amount the banks are willing to borrow on each loan has declined. Unfortunately this has led to many turning to loan sharks and doorstep lenders.
- Most loans are not flexible. Although some lenders will allow payments holidays and will be sympathetic to a change in circumstance many won’t and will demand full payment at all times. If a payment is missed then your credit rating can be damaged very quickly. A loan may address the symptoms of debt but at Liberty we don’t just look for a quick fix and instead offer ongoing support and advice which can be invaluable to those with irregular income.
- Despite one of the lowest base rates in history personal loan interest rates remain incredibly higher. A Typical APR for those with a perfect credit file is now (April 2009) around 12.3% although for most the rate will be much higher than that and up to 1,500% with some doorstep lenders.
- Most consolidation loans last 7 or 8 years. This can seem like an eternity (and is much longer than an IVA) if you are making monthly payments. By spreading the debt over a longer period you usually end up paying far more back in interest.
Re-mortgaging
A re-mortgage is the least drastic way to clear your unsecured debt. It will simply restructure the debt over a longer period and should result in one lower payment each month. Due to recent falls in property prices the amount of equity available to people has reduced and coupled with the stricter lending policies of the banks a re-mortgage is now a less feasable way to clear debt.
However it is something that we always consider first and are able to offer further advice on. Your ability to re-mortgage will be based on a number of factors such Loan to Value (LTV) age, income and credit rating
Pros
- A single lower monthly payment.
- Has little or no adverse effect on your credit rating.
- A mortgage broker (we can recommend) can often arrange a re-mortgage even if you have been declined elsewhere.
Cons
- A re-mortgage is secured on your property and as such uses up any equity in it and could lead to repossession should you be unable to meet the monthly payments.
- Your debt will be spread over a longer period (often 25 years) and as such could take longer to clear.
- Most lenders now offset attractive interest rates with large arrangement fees that can be as high as £2,999. There are also heavy penalties for early repayment to consider.
If you feel a re-mortgage or debt consolidation loan may be your best option then why not complete our express enquiry form and we will call you back. At Liberty we work along side a national broker that specialises in debt consolidation and by assessing the whole market can find you the best deal.
