Managing money is not as easy as it sounds. Your employment, your home, your expenses, your lifestyle – everything impacts your finances. Life is complicated as it is, and when someone throws debt into the mix, things might go off-balance. Debt consolidation loans have stringent qualification requirements. So, if you’re not eligible for one, take a look at these 5 alternatives that you can use instead
At some point in life, we all set certain financial milestones. It could be our first car, the first time we rent our apartment or buy our own house. All of these milestones require money, and more often than not, it is wiser to finance these expenses with a loan – Managed debt.
Everybody encourages responsible borrowing, but sometimes, our circumstances can force us to take on multiple loans. While debt itself isn’t the problem, accumulating more debt than you can afford to repay, is. Managing multiple debts can be perplexing, especially in the case of unmanaged debt. Not only is a default detrimental to your credit score, in some cases, but it might also land you a CCJ.
If you’ve been denied a debt consolidation loan for some reason, cast aside your worries. In this article, we’ll shed light upon some alternatives to a debt consolidation loan to turn your bumpy ride of financial management into a smooth sail.
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Representative Example: £12,000 over 66 months, 31.9% APR fixed. Monthly payment £358.22 Annual interest rate 28.01% fixed. Interest payable £11,642.52. Total repayable £23,642.52.
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Representative Example: £12,000 over 66 months, 31.9% APR fixed. Monthly payment £358.22 Annual interest rate 28.01% fixed. Interest payable £11,642.52. Total repayable £23,642.52.
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Representative Example: Borrowing £3000 over 36 months with a representative APR of 39.9% (variable),the amount payable would be £134.21 a month,with a total cost of credit of £1831.56 and a total amount payable of £4831.56.
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1Plus1 Guarantor Loans
Loan Amount
£1000 -
£10000
Loan Term
1 -
5 years
Representative APR
39.90%
Minimum Age
18 years
Minimum Income
Not mentioned
Representative Example: Borrowing £3000 over 36 months with a representative APR of 39.9% (variable),the amount payable would be £134.21 a month,with a total cost of credit of £1831.56 and a total amount payable of £4831.56.
What is debt consolidation?
- Debt consolidation simply refers to consolidating multiple debts into a single loan. If you are dealing with different kinds of debt in varied amounts, keeping up with the repayments can be challenging. Debt consolidation helps you organize all your debts to help you manage repayments.
- All you need to do is some number crunching. Work out how much you owe towards all your debts in total. Most people use a personal loan to consolidate their debt. A debt consolidation loan is, essentially, used to pay off your ongoing debts. Once those debts are cleared, you’ll just have to repay towards the debt consolidation loan.
There are two types of debt consolidation loans:
- Secured debt consolidation: A secured debt consolidation loan is one wherein you’ve to secure a collateral against the loan. If you default, the lender can repossess your asset.
- Unsecured debt consolidation: An unsecured debt consolidation loan is one which is not secured against an asset.
But a debt consolidation loan isn’t the ideal solution for everyone. Debt consolidation loans are often unsecured, so the lenders have strict eligibility criteria. Moreover, the loan amount may not be sufficient to cover the kind of debts you’re trying to defuse.
Before we discuss the alternatives to a debt consolidation loan, let us understand what kinds of debt you can consolidate.
What debts can I consolidate?
Ideally, you should consolidate debts that can be paid off early. The list includes, but is not limited to, the following:
- Credit card balance
- Loans – long-term and short-term
- Tax arrears
- Debt from a debt collection agency
- Bank overdrafts
- High-cost, short-term credit such as payday loans
- Bailiff debt
- Outstanding utility bills
5 Alternatives to a debt consolidation loan
Unsecured debt consolidation loans are tough to secure owing to the strict eligibility criteria. Besides, if you’re tackling a rather large amount of debt, the proceeds from a loan may not suffice. But don’t lose hope just yet. Here are 5 alternatives that you can use instead of a debt consolidation loan:
- Balance transfer cards: You can use a balance transfer card to transfer outstanding balances from other credit cards. You can also use a balance transfer check to combine all your outstanding debt. Balance transfer cards are available at 0% interest rates during the initial promotional period, usually from 12 to 21 months. As soon as the promotional period ends, you’ll have to pay standard interest on the remaining balance. Furthermore, most cards will levy a charge of 2-5% on the total amount you transfer. Although, check your credit score before applying for a balance transfer card because you’ll need a good credit score to avail this facility.
- HELOC or Home equity loan: HELOC and home equity loans allow you to use the equity in your property to borrow money. Home Equity Line of Credit or HELOC is a type of revolving credit wherein lenders set a borrowing limit based on your equity. How much you utilize from this money is up to you. You’ll only have to pay interest on the money that you use. Home equity loans allow you to borrow money against your equity in the property, payable over fixed monthly instalments. Both these forms of credit let you borrow a significant amount of money that you can use to consolidate high-interest debt. However, consider the associated risks before choosing a HELOC or home equity loan. If you default, you could lose your home. Plus, these forms of credit require you to have at least some equity in your home. Both HELOC and home equity loans have comparatively long repayment periods and lower interest rates than debt consolidation loans. But again, it largely depends on how much equity you have in the property.
- Cash-out refinancing: Cash-out refinancing can work out for those who have sufficient equity in their homes. Cash-out refinancing works like remortgaging. You replace your existing mortgage with a new one, with a loan amount than your current outstanding balance. You can use the difference to consolidate your debts.
- Debt Settlement: Debt settlement is the process of negotiating with your lender to pay a lower amount than what you owe. This reduced pay-off will now be the full and final settlement of that debt. You can either negotiate with the lender yourself or get a debt settlement firm to negotiate on your behalf. If you choose a third party to negotiate on your behalf, you’ll have them a fee. But beware, because this kind of settlement can severely damage your credit score.
- Declaring bankruptcy: To file for bankruptcy, you can go to a federal court to either get your debts discharged. Filing for bankruptcy also allows you to reorganize your debts to give you more time to pay it off. Bankruptcy can get you out of most debts, but it’s not very helpful with tax debts. This method of debt consolidation, however, gravely harms your credit score. It may take years for your score to recover, so check your options well in time to make an informed decision.
Beware of resorting to these debt consolidation alternatives
- Debt relief through bankruptcy: If your financial circumstances are in bad shape, and you won’t be able to oblige to a debt management plan, there’s no point in entering into one. Before declaring bankruptcy or resorting to a debt relief plan, it is better to discuss your case with a bankruptcy attorney. Depending on the type of bankruptcy you file, it can stay on your credit file for up to 10 years.
- Debt relief through debt settlement: Debt settlement may do you more harm than good. However, you may take up this option if you’re overwhelmed with debt and aren’t eligible for bankruptcy declaration. Herein, debt settlement companies ask you to cease all your repayments to creditors and put the money in an account that they control. You essentially keep falling behind all your repayments. Now when the creditor is approached with a repayment offer, they’ll have to accept whatever money the company will offer. The fear of not recovering anything will tempt the creditor to agree to the final settlement. All these missed repayments will gravely damage your credit score, hampering your chances of securing any credit in the future.
