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Loans - How to pay less for your debt

Debt is a growing problem in the UK, with personal debt alone currently standing at £1.4 trillion. When it is not dealt with properly, individual debt easily spirals into something that can seem unmanageable. According to YouGov, 6.5 million people have opted to consolidate their debt over the last three years, with 1.4 million going for sums of over £20,000. With the recent credit crunch, the latest polls show that a fifth of people are concerned about being able to pay their mortgage, while 25% consider their debts unmanageable. But there are always ways to tackle debt and hopefully help reduce your monthly outgoings down to a reasonable level.

If you have multiple debts, it is seriously worth considering taking out one loan to cover everything. It might sound foolish to borrow more money on top of what you already owe, but the trick is to find a loan with a cheap interest rate. That way, you can pay off all your original debts and hopefully save money by having just one smaller repayment to make each month and at a good rate. By sticking to that, you eliminate the stress of dealing with different lenders and payments, and hopefully get back into the black quicker than you would have otherwise.

If you decide to go for a debt consolidation loan, then the most important thing is to work out how much you owe in total. Include in this calculation credit cards, store cards, loans and overdraft – if you are really pushing to clear your debt once and for all then it makes sense cover absolutely everything. Also take into account what interest rates you are paying so you can ensure that you are getting a cheaper rate overall. A great way to compare what deals are available to you is to use an online comparison site. By seeing what is available, you can decide how much you want to borrow, at what rate and how much you can afford to pay back each month.

A debt consolidation loan does not have to be a conventional personal loan. True, secured loans are a good way to get a lump sum at a lower interest rate, but credit cards, overdrafts and unsecured loans can also be used. Depending on the amount of money you owe, it might be worth thinking about either a remortgage or a second mortgage. It is important to remember, however, that the current economic climate means that not only is a loan harder to come by, but interest rates are also higher. If you are unsure about your application, it is a good idea to talk to your bank.

If the amount of money you owe is quite small, for instance a few thousand, it is worth considering using the overdraft on your current account to consolidate your debts. Unlike a personal loan, which comes in a fixed lump sum and you repay over a set amount of time, you can repay any amount you like and also borrow again as long as you don’t exceed your overdraft limit. Credit cards are also pretty flexible in this way and it is possible to get a card with 0% interest for a fixed period. Obviously the disadvantage is that with the flexibility comes room to slip up. If you choose to go down this route, discipline is key if you want to pay off the debt for good.

Finally, the golden rule of debt consolidation: take out a loan for the amount you need and that amount only. Unfortunately people sometimes get approval for a debt consolidation loan, but then don’t use it to pay off all their debts or add a little on to the loan amount for other purposes. Obviously that is not going to help reduce the amount of debt you have and instead, might actually increase the overall amount of money you need to repay.