Interest rates look to be on a clear upward trajectory. It, therefore, makes sense to ensure that you’re managing any debts you have as effectively as possible. Debt consolidation may be a way to achieve this but only if it’s done the right way. With that in mind, here are some points to consider if you are thinking about it.
Define your key goal
There are three main reasons for consolidating debts. These are convenience, economy and affordability. Any form of debt consolidation is likely to have the benefit of convenience because it will automatically reduce the number of credit products you have to manage.
Some forms of debt consolidation will be both more economical over the long term and more affordable in the present. Often, however, you will need to make a choice between reducing the amount you pay overall and reducing the amount you pay in the present.
For example, if you make lower payments over a longer period, you’ll get breathing space in the present but could pay a lot more overall. With that said, if you’re careful about how you manage your finances, you may be able to avoid this by switching to a better deal later.
Review your options for paying off your debt
Before you decide whether or not to consolidate your debt, it’s advisable to review your options for paying it off. In addition to standard debt-management strategies, you might want to look for higher-impact options that could have a quicker result.
See if you have assets you can monetise
If you’re a homeowner and you have non-mortgage debt (other than a student loan), you need to manage it very carefully. Even if it’s technically unsecured, your creditors can still make a claim against your home if you default on it. They would have to do so via an application to a court but the possibility is very definitely there.
This means that if you have any doubts whatsoever about your ability to pay off your debts, you should make it a priority to see a financial professional. If you are currently solvent but only just, then you may want to think very seriously about selling your home. This puts you in control of the process and maximises your ability to maintain your credit record.
If you’re reasonably confident about managing your debt, then it could make sense to consolidate it with your mortgage. That would allow you to leverage the equity in your home, which may have increased considerably over the last couple of years. It might also allow you to swap a variable interest rate for a longer-term fixed rate for extra security.
Consider tapping into your pension
If you’re over 55, you may be able to withdraw funds from your pension to pay some or all of your debts. Objectively, the amount you can expect to earn from your pension fund is likely to be less than the amount you will pay in interest on consumer debt.
The problem is that (under current rules), only 25% of any withdrawal you make is tax-free. Once you add tax into the equation, you might find that withdrawing money from your pension could be more expensive than just paying interest on the debt.
Review your options for consolidating your debt
There are two main options for debt consolidation. These are credit card balance transfers and loans. In principle, credit card balance transfers can be a great option since they often allow you a period with no (or at least low) interest. Depending on the card, this can be anything from a few months to 1-3 years.
In practice, however, it can be challenging to qualify for these great deals. This means that, in the real world, loans may be your only practical option. You can get specific debt-consolidation loans but they aren’t necessarily the best choice. You may get better value from a niche lender, especially a credit union or a peer-to-peer lending platform.
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