Debt Consolidation Options
Consolidating debt doesn’t just mean taking out a new loan to pay off smaller loans. It is the process of making your outgoings more manageable by bringing them all together. This can be done using one of the options detailed below.
While this may not always address the issues that got you into financial trouble in the first place, depending on the solution you choose, consolidating debts may make it easier to manage your situation and can help put you in a better financial position.
If you have problem debt, we would always recommend that you discuss your situation with an experienced debt adviser. This may help you better understand your options and allow you to make an informed decision on what’s right for you.
Reasons Why People Consolidate Debt
There are many reasons why you would consolidate debts. Some of these include:
- Living expenses have gone up and you are unable to make the monthly payments
- You’ve accumulated payday loans due to unavoidable circumstances or reduced income
- High-interest credit cards are eating up your budget
- You’ve been keeping yourself afloat using a bank overdraft
Ways to Consolidate Debt
There are several debt solutions that allow you to consolidate all your payments. Each option has distinct advantages and drawbacks and every option is not available to everyone. It all depends on your financial situation and preferences.
Below is a brief overview of the available options:
Borrowing From Family or Friends
This is one of the cheapest ways to consolidate your debts. However it requires a lot of thought as while borrowing from family and friends may be a great option, it can fundamentally change a relationship with the person from whom you borrow. For instance, if unfortunate things happen which prevent you from paying them back, the relationship could turn sour.
Consequently, if you decide to go this route, be sure to do it right. Consider creating a contract that outlines each person’s responsibility, the amount borrowed, the repayment period, the interest rate and the payment frequency. Also, keep track of the payment made and the balance due.
Replacing several loans with one loan can help you regain control of your finances. However, don’t consolidate your debts for convenience since there are several pitfalls to consolidating debts including extending the loan term, hurting your credit score and jeopardizing assets, to name a few. Just be sure to get independent financial advice before consolidating your debts.
Debt Consolidation Loan
This is one of the most common methods of debt consolidation. It involves taking out a personal loan from a bank, credit union or other financial institution to pay off outstanding debts and consolidate them into one large loan.
A personal loan is an unsecured loan, meaning if you default, you won’t lose anything. However, the creditor can pursue you for the debt. One of the most important things about using a loan to consolidate your debts is that it has a low-interest rate, which can range from 5% to 36%. The interest rate is largely dependent on your credit score and the amount you borrow, these loans are paid off in a set amount of time (typically two to seven years).
This is one of the methods of debt consolidation in Scotland. It involves taking out a personal loan from a company and asking someone else to act as a guarantor on your behalf. Your guarantor then becomes responsible for the loan, should you default on it and become unable to pay it yourself.
Recently, guarantor loans have come under criticism for the way they’ve been offered without the correct affordability checks, which has caused some of the leading providers of guarantor loans to cease trading.
No matter how appealing it may seem, you should always seek advice before committing yourself or anyone else to take out a guarantor loan.
Credit Card Balance Transfer
Using credit cards for clearing debt is very similar to a loan, you just open up a new credit card with a limit higher than your personal loan debt and transfer your credit card balances onto the new card. Most credit card providers offer a promotional 0% p.a. rate for a limited period after which standard rate will apply. This option has low-interest rates and offers payment flexibility – you can pay more than your minimum payment each month.
This method is not without its drawbacks as you need a very good credit score to qualify for the best interest rate, there can even be fees on the amount you transfer which. This can lead to even more credit card debt as you’ll increase your borrowing capacity if you don’t cancel your old cards.
Settling debts involves offering your creditors a lump sum payment to pay off part of what you owe them. In return, they will write off the remaining balance.
If your creditor thinks that this is a better option than waiting for you to completely pay them back, they may accept the offer. However, you are unlikely to succeed if you call the creditors yourself and offer the debt settlement.
If you don’t feel confident doing this yourself then you can work with a qualified money adviser such as Money Helper.
These organisations may have a better understanding of which creditors (the people to who you owe money) are likely to accept and what they won’t consider.
If you do get an offer of debt settlement, always get the offer in writing. Always then get confirmation that the funds have been received and the debt
Trust Deeds and Formal Scottish Debt Solutions
This is a legally binding agreement between you and your creditors to pay part of what you owe. The agreement can only be administered by a certified Insolvency Practitioner (IP) who will act as the trustee. This method involves transferring your assets to the trustee so that they can manage them with the aim of paying your creditors. Additionally, it prevents your creditors from adding more interest to the money you owe, taking legal action against you and repossessing your home and car.
Protected Trust Deeds are designed to help individuals who have at least £5,000 worth of debt. Your trustee will make regular payments towards your debts for a period of 4 years. At the end of this period, any outstanding debt is written off by the creditors.
This option is particularly helpful if you’re struggling to pay your debts within a certain timeframe. If you’re considering this method, Trust Deed Scotland® can help.
We’re known for our ‘excellent’ service as per our 6,000 TrustPilot reviews and we offer formal debt solutions designed to help individuals manage their debts.
Debt Arrangement Scheme (DAS)
If you are unable to get further credit, then a DAS may be a good solution for you. Using the Debt Arrangement Scheme, you will make an offer to your creditors which will freeze the interest and charges on your debts. You will then make an affordable monthly payment.
Contact Trust Deed Scotland if you would like to receive tailored debt advice today.