Is Debt Consolidation the answer?

Debt Consolidation

Put simply, debt consolidation is swapping a number of small loans for one bigger one, usually secured on your home (like your mortgage) and often over a longer period. You’ll pay less per month and, if your current debts include a number with high interest rates (like store cards) you may even pay less overall.

Debt Consolidation Loan

A debt consolidation loan may be a debt solution for you if your debt problems are not severe – for example if cutting the interest rates you are paying is all you need to do to see the wood for the trees. Or, you may need to consolidate debt if your income has gone down – provided you have budgeted carefully and have no illusions about what you can now afford.

Debt consolidation can also be a help to those people who face unexpected financial commitments and have equity in their home. You are unlikely to find a cost-effective debt consolidation loan if you are not a home owner with a mortgage that is considerably lower than the value of your home.

It’s highly likely that your new debt consolidation loan will be secured on your home – like your mortgage: Fail to pay and you could lose your home.

So, do your budgeting very carefully and consider the risk. If the switch only yields small savings and if you cannot use those savings to repay more debt, then you may be stepping from the frying pan into the fire. If your situation continues to get worse and you can’t afford the repayments you could be facing repossession.

We would advise you to walk away from the debt consolidation option if the following is true of your situation:

If you’ve had a consolidation loan before and have debt still owing from it

If you are going to use the loan to free up store or credit cards that you need to use again

If either of the above are true, or if you have consolidated loans several times before it’s likely you’d be better off looking at whether a ClearDebt IVA
may be right for you – you can get an initial assessment in just a couple of minutes by using our ClearDebt Analyser.

Consolidate Debt with a Consolidation Loan

Think hard before deciding a consolidation loan is right for you. When you consolidate debt nothing is written off, it's just moved from an expensive loan to a cheaper one. Debt consolidation can be a costly option and can put your home more at risk.

Debt Consolidation

If you think your debt situation is likely to improve, debt consolidation could be the answer. If you feel your debt will still continue to rise, then debt consolidation could just be a step on the road to bankruptcy.

More information:

Equity release plans

If you have value in your home an equity release plan or home equity reversion plan can be used to either obtain a lump sum or a a regular monthly income. They are generally only available to those over 60 years old who own their home and have no mortgage.

What are equity release plans for ?

Equity release plans are designed to help you if you are at retirement age and own your home having paid off your mortgage. They are used where you wish to stay in your home but would like to sell part of it to generate a lump sum or a regular monthly income.

How do equity release plans work ?

In return for you giving the equity release plan provider a certain percentage of your home the plan provider will give you a lump sum of money or a regular monthly income. You will continue to own and will be allowed to live in your home until you die or have to move into a long term care home. At this time your home will be sold and the equity release plan provider will recover their debt.

How much money can I release from my home ?

This is directly related to your age and the value of your home. The equity release plan provider will estimate when they think they will be able to recover their debt through a sale of your home and also estimate its value. They will then work out what lump sum or monthly income they can provide to you today which after the addition of interest will be repaid at the future estimated date.

What are the pitfalls of equity release plans ?

These equity release plans are very complicated and are at present unregulated by the Government so you must take specialist advice from an Independent Financial Advisor as to the suitability of a plan and the terms that are granted.

You should ensure any equity release plan contains a negative equity guarantee which means that if the value of your home falls then so does the value of the plan debt. In this way you will guarantee that whatever happens your estate will not be left with a debt after the sale of your home.

Often equity release plans will not allow you to move home and transfer the plan to another property. If you live with a partner then the plan must be in joint names ensuring you are both able to live in the home for life. However as the equity release plan provider will not get their money back until both of you have left the home the amount you can borrow will be lower.

Links to related ClearDebt articles:

Debt Management Advantages and Disadvantages
Equity release plans

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