Life after debt
Question
I've got myself into about £6000 of debt and I really want to sort it out. I'd prefer to get one loan so I'm not dealing with lots of creditors, but I don't want to get tied up with loan sharks. How do I choose which company to use?
Answer
It sounds as if you are considering 'consolidating your debt' - that is when you take out a new loan to pay off all your other debts. It can be a good way of taking control of your finances, as long as you proceed with great caution.
The recession has spawned countless numbers of companies offering 'debt consolidation loans' and promising to end all your troubles. While they are not loan sharks, they may not have your best interest at heart. If you have a poor credit rating you may end up paying a very high rate of interest. Also, if the new loan is secured against your home you could lose the property if you fall behind in your payments. Extra fees may be charged for setting up the new loan and you could end up paying much more in the long-term.
So before you take the plunge, it might be better to try to make new arrangements with your existing lenders and make the best of the credit options you already have by prioritising your debt. That means focusing on your mortgage or rent, taxes and utility bills before moving on to credit cards and store cards.
If you still want to roll all your debt into one loan, start by approaching banks, building societies or some of the larger players in the field.
In looking for a loan you will need to decide whether or not you want to borrow at a fixed or variable rate of interest. A fixed interest loan might have a higher interest rate, but you know what your payments will be every month. The variable rate might be cheaper, but if interest rates go up your repayments go up, too. If they increase significantly you might not be able to keep up the payments.
If you take out any loan it's likely you will be offered payment protection insurance. Think very carefully about taking out this insurance as it can add a significant amount to your monthly payments and the cover offered might not be appropriate to your circumstances.
Your local Citizens Advice Bureau will be able to offer you practical help and advice for managing your debts, as will National Debtline on 0808 8084 000.
Updated: 12/04/2010
Question answered by CAB
