If you’re experiencing financial difficulties and are assessing your options to repay your debt, you may have considered that a consolidation loan is the best way to consolidate debt for you.
But don’t discount the options of Trust Deeds, Debt Arrangement Scheme, and alternatives because there are circumstances where one of these debt management tools could provide a more suitable solution.
Whilst at first glance the solutions may appear to be similar and share many of the same advantages, fundamentally, they are very different.
Consolidating debt usually involves taking out new credit in the form of a Debt Consolidation Loan to pay off existing credit. Extra costs can be involved and to understand the risks, it’s important to get impartial advice before going ahead with your application.
Statistically, many people who take out a further debt consolidation loan will end up using credit again. Therefore, they’ll then be repaying debts to more than one company again. If you’re struggling with unaffordable debts at the moment, you may not be able to afford payments to a Debt Consolidation Loan. Examine your income and expenditure to find out what money you have available and make sure you can comfortably afford the repayments.
Which option is best for you will be heavily influenced by your personal circumstances. You should, therefore, take time to understand each option, to ensure you come to an informed decision and always seek balanced expert debt advice before committing to any financial product.
The duration of a debt consolidation loan will be determined by how much you borrow against how much you can afford to repay each month. The maximum duration typically for an unsecured consolidation loan is 10 years.
The Trust Deed has a fixed duration of typically 48 months, after which the Trust Deed completes and unaffordable debts are satisfied. Any debt left unpaid at this point is written-off under the terms of the Trust Deed.
Repayments to a consolidation loan are offered by the creditor based on the amount required each month to repay the debt over a given duration. The borrower must assess whether they can afford the repayments for themselves before they accept the agreement.
Payments are set to what is deemed to be affordable to you.
Debt Written Off
There is no debt write-off with a consolidation loan. Unless any settlement figures can be negotiated in writing, the full debt must be repaid.
Any outstanding debt remaining after the fixed term has completed must be written off by your creditors.
If you keep up to date with all your repayments, your credit score won’t be affected by having a consolidation loan.
Entering into a Trust Deed has a detrimental impact on your credit rating for 72 months.
If you have a poor credit history (for example, a record of missed payments and defaults, decrees, or previous insolvencies, such as a Trust Deed or Sequestration) you’re more likely to be offered consolidation loans with higher interest rates. If this is the case, consolidation loans may not be the best way to consolidate debts for you.
A debt consolidation loan is a legally binding contract, just like any other unsecured loan. Failure to maintain payments can result in legal action being taken against you which could, ultimately, lead to you being sequestrated.
A Trust Deed has a degree of flexibility if payment problems occur. A temporary payment break can be given by the Insolvency Practitioner if deemed necessary, or they could reduce your Trust Deed payments and extend the Trust Deed term without the need for creditor approval.
Fees and Costs
All interest and administration costs are built into the loan repayments and paid for by the borrower.
All Trust Deed fees are deducted out of the monthly Trust Deed payments and in most circumstances, are borne by the creditors. There are typically no initial setup fees for a Trust Deed from a reputable firm, like Trust Deed Scotland.
Debt Consolidation Example – Loan Vs Trust Deeds
If you are currently paying £636 per month on debt repayments, owe £20,000 and found a loan at 12% APR. This would compare as follows:
Debt Consolidation Loan Required ✓ £20,000 ✓ Term 48 Months ✓ New Monthly Payment £521 ✓ Total Repaid £24,992 ✓ Monthly Debt Repayment Reduced by 18%
Total Debt Included ✓ £20,000 ✓ Term 48 Months ✓ New Monthly Payment £175 ✓ Total Repaid £8,400 ✓ Monthly Debt Repayment Reduced by 61%
You may be able to get a debt consolidation loan with a more favourable APR%, or longer term. These may be typically secured against your property.
However, if you’re already struggling with debt – the APR% may be typically higher.
We would always suggest looking at all Scottish debt solutions also.
Debt Consolidation Loan Considerations?
If you think that the best way to consolidate all your debts is a debt consolidation loan, rather than a Trust Deed or other Scottish debt solutions.
- Always pay your existing debts in full
- Cut up all your credit cards and cancel previous credit agreements, otherwise, you might be tempted to borrow more money
- Get free, expert debt advice before going ahead with this option – there may be better ways for you to deal with your debts
Where Can I Get Scottish Debt Help?
There are a variety of debt solutions available in Scotland to help deal with your debts, regardless of the minimum or maximum amount of debt that you owe.
If you’re looking to find out the best way to consolidate debt, you can find out more about the solutions by visiting our online debt advice page.
Or, if you would prefer to speak a qualified debt expert, you can give us a call on 0141 221 0999 to find out more. Any advice offered is free, balanced, and non-judgemental.
Find 1000’s of 5* Reviews on TrustPilot. We’re the leading debt relief company in the whole of the UK.