It is nothing short of a nightmare to have multiple debts and be unable to keep up with payments. Falling behind on payments causes late payment charges and interest penalties, adding to the debt. If your account goes into default, your lender will send it to collection agencies, who will be responsible for collecting payments from you. If you still refuse to discharge the debt, you will be taken to court, and once a CCJ is issued, your credit score will be almost permanently damaged.
The convenience that small personal loans in Ireland offer is partly to blame for falling into debt. The loan amount is exiguous that lenders make the decision based on your income sources. Eventually, you find yourself up to your neck in debt. If you have accumulated debt and find it hard to strike a balance between them and other essential expenses, consolidation should come in handy.
What are debt consolidation loans?
A consolidation loan is a personal loan equivalent to the existing debts that you use to pay them off once and for all, so that you can spread the cost of the debt.
- Consolidation loans include short-term high-cost debts that are paid off in one fell swoop. No interest will accrue as a result of missed payments, and minimum payments will accrue if you consolidate them into one personal loan.
- Payments are more manageable as they remain unchanged throughout the entire term. Since payments are predictable, you can easily budget around them.
- Personal loans cannot consolidate instalment loans such as mortgages, car loans and the like. They cannot even consolidate credit card debt. To get out of credit card debt, you will have to apply for a balance transfer card.
What are the common methods of consolidation?
Now you know that you can use personal loans to consolidate your existing debts. Still, they are an effective solution only for consolidating short-term loans with bad credit and guaranteed approval. If you have credit card debt, you will need to apply for a balance transfer card. They are available at a 0% interest rate provided you settle your debt within the introductory period.
Do not forget that you will have to pay balance transfer fees. Consolidation loans and balance transfer cards both require you to have a good credit history. The introductory period is usually between 6 months and 18 months. If you fail to settle the balance within the introductory period, you will end up paying much more interest on your credit card debt.
It is always advisable that you consolidate your debts before falling behind on payments. Though there are some lenders who accept applications from subprime borrowers as well, they charge high interest rates, and therefore it might not be a money-saving alternative.
Apart from a personal loan and a 0% balance transfer, the other methods of consolidating debts include:
- Home equity loans
Home equity loans enable you to borrow money against the equity you have built in your house. This is a suitable option for those who are on mortgages. Equity refers to the difference between the market value of your property and the outstanding mortgage. Bear in mind that lenders will not fund against the entire equity. Most of the lenders do not offer more than 70%.
It is important to note that home equity loans are considered a second mortgage. You will have to deal with them separately. They are never combined with your mortgage. Since home equity loans are secured against your house, you will likely receive lower interest rates, but your house is at risk of foreclosure in case of default.
- Cash-out refinancing
Cash-out refinancing is aimed at those borrowers who do not want to handle mortgage and equity loans separately. They replace your existing mortgage with a new one, allowing you to release equity you have built. However, there are certain rules you need to meet to be eligible for cash-out refinancing.
- You must have been residing in your property for at least a year.
- The outstanding mortgage should not account for more than 80% of your property’s value.
- You must have a good credit score and a debt-to-income ratio of less than 40%.
You will need to pay off the exit fees to settle your existing mortgage. Make sure that it does not counteract the savings from cash-out refinancing.
- A debt management plan
A debt management plan should be considered when you cannot qualify for the aforementioned methods. Debt management companies offer debt management plans. They will negotiate with creditors for lower interest rates and fees.
You will make payments to the debt management company that will distribute funds to creditors after deducting fees. Bear in mind that a debt management plan will be recorded on your credit report and will continue to show up for six years. Your credit score will be badly damaged.
What are the steps to consolidate your debt?
Here are the steps you need to take to consolidate your debt:
- First off, you need to identify how much debt you owe. Figure out which one costs you more. Lenders will not be able to consolidate all outstanding debts, so try to choose the most difficult ones.
- Check your credit score and see whether you are eligible or not.
- Explore consolidation options. Factor in fees, interest rates and repayment terms and the impact of the consolidation method on your credit score.
- Make sure you adhere to payments.
Note that consolidation does not reduce the amount of debt. It is likely that you still struggle with payments if debt is disproportionately high. If consolidation does not seem to be the best solution, consider alternatives such as debt avalanche and debt snowball.
The final word
Consolidating multiple debts can simplify payments by spreading the cost. Still, it does not reduce the loan amount, nor does it guarantee that you will be able to consolidate all outstanding short-term high-cost debts. Consider other alternatives such as avalanche and snowball too.