Different debts need different solutions.
Firstly, different debts would have different consequences if you had problems paying them. For example, falling behind on unsecured debt repayments (such as a loan, credit card, or overdraft) may affect your credit score and/or you may get fined. Falling behind on your mortgage could lead to repossession (not at once, of course). For that reason, certain debts should be treated as a priority.
Secondly, depending on your income, debts and general financial circumstances, different debt solutions might be available to help you, such as the ones you’ll find at the Debt Advisory Centre.
Here, we’ll look at two ways to deal with debt – using your savings, or taking out a debt consolidation loan.
The amount of interest you could earn on any savings is (generally) significantly lower than the amount of interest you would be charged on a debt of the same size. For that reason, experts often argue that it’s better to repay debt with savings – as that would save you money overall.
While it does seem logical to repay debt with any savings you may have, at the same time it can be really beneficial to have savings in case a ‘rainy day’ comes along. As long as you can afford to keep making your regular unsecured debt repayments, you may decide there’s no need to repay your debts with savings.
It may not sound very logical – borrowing more money to repay what you’ve borrowed already. However, a debt consolidation loan could make your finances much simpler.
There are two types of debt consolidation loan: secured and unsecured. Secured debt consolidation involves borrowing money against the equity in your home to repay any unsecured debts. A major advantage is that you could borrow the money at a lower rate of interest and spread the payments over a longer period. That could make your payments cheaper every month, but may cost more in interest overall (as you would be paying interest for longer).
However, before securing any debt against your property, consider that if you can’t make your repayments, your property could be repossessed.
An unsecured debt consolidation loan is simply a loan that is large enough to repay all your other unsecured debt (credit card, overdraft, personal loan) leaving you with one monthly payment.
You could lower your monthly payments with a debt consolidation loan, but again, spreading the payments over a longer period could cost you more in interest overall.
Anyone who applies for a loan will be credit-checked. Bear in mind that if you have had problems paying bills or repaying debt in the last six years, you may be turned down for a debt consolidation loan.
It’s also vital to consider whether you will be able to keep up with the repayments. If your income changes month to month or you’re already struggling to pay for everything you need, a debt consolidation loan may well not be right for you.
If you are having real problems with debt, it may be time to look at some of the other debt solutions that are available.
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