Debt is a big problem in the UK, with most people having a combination of loans, overdrafts and credit cards needing to be paid. Is it any wonder that with the nation in debt, consolidation companies are breeding like rabbits?
The idea behind a consolidation loan is simple. The company pays off your arrears, you pay the company. Instead of having 4 or five large monthly debts and debtors phoning you every evening, you'll have one easy-to-manage monthly payment to one company and get all those debtors off your back.
There are two main ways to go about consolidating your debts. Firstly, obtain your credit file so you know exactly who you owe money to. Phone up all your debtors and ask them for a settlement fee. Some companies will offer a discount for paying off an outstanding debt in full.
Then, look on the internet for different loan companies, and compare interest rates. Be careful not to get too many quotes as these will go on your credit file and could go against you, but looking at an average APR should give you an idea.
Once you have found an APR that looks competitive, apply for a loan amount which will cover your debts. Don't be tempted to borrow more than you need to, as this defeats the object! Once you have the loan, make sure you keep up the payments. A debt consolidation loan can be an easy solution to multiple arrears, provided you can afford the repayments.
If you have substantial debts, you may be tempted to contact a debt management company for help. These also offer debt consolidation, and will pay the arrears on your behalf. You then pay the consolidation firm, but at a much higher interest rate than you would expect from a standard lender. You may find your debts are even higher after using these firms, so they are best avoided.
J Tillotson is a financial author based in the UK.
