To consolidate or not, that is the question
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Television is awash with adverts from debt consolidation companies. They seem to offer a tempting ‘quick-fix’ solution to debt whereby you take out one loan to cover all your existing repayments. However, I advise caution.
Having someone else take the effort away from dealing with all your creditors may sound like a dream, but debt counsellors advise people to steer clear. This is because the interest rates charged on these loans are normally much higher than you can get on the High Street.
In addition the lower monthly repayments are usually achieved by spreading the loan over much longer periods. If the consolidation loan is to help you become debt free this may not be the answer.
Consolidation loans often come with payment protection insurance (the dreaded PPI) with unfair terms, which may not cover you if you are made redundant or fall ill. They are also ‘secured’ loans, which means that if you are unable to keep up repayments you will lose the roof over your head.
If you are sure you want to consolidate your loans into one payment, you should shop around for a competitive rate on the High Street and get a normal unsecured, personal loan.
People in debt should also avoid paying for so-called “debt counselling”. There are plenty of free services available.
A general rule is to pay off your debts, such as your mortgage and credit card, before you start to save money. This is because the amount of savings income you can get is almost always dwarfed by interest rates you pay on your debts.
To check whether you are better off saving or repaying your debts, you should compare the interest rate on your credit facilities with your savings or investment rates.
You should also factor in tax that you will have to pay on your savings – at 20% for basic-rate and 40% for high-rate taxpayers. At the moment with interest rates at historically low levels, it is probably better to pay off your debts.
Remember, meeting repayments on essential services such as your mortgage and utility bills should be your first concern. If you are paying off a range of credit cards and store cards, you should pay off those with the highest rate of interest first.
You could also switch your balance to a credit card which charges a lower rate of interest – there are many providers of these special “balance transfer” deals. Despite a harsh impression, most companies are sympathetic to people who cannot afford repayments. Recovering debt can be enormously expensive, so they are often willing to work out an agreement with you.
Here are some of the free advice services to help you manage your debts.
The Consumer Credit Counselling Service (0800 1381111),
National Debtline (0808 8084000)
Citizens Advice (www.adviceguide.org for advice or to find local bureau).
