Debt Consolidation Loans – the Pros and Cons

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If you have a number of debts with different creditors, then you may have considered a debt consolidation loan. But what are the pros and cons of a debt consolidation loan? Find out below…

Debt consolidation loans – what are they anyway?

A good question to start with. A debt consolidation loan is a single loan that a person takes out to cover several smaller loans. Why would someone want to do this? Well, it means you are making one payment rather than several, so it is easier to manage, and often, the repayment amount will be less than the combined repayments for the other loans.

The Pros

Fixing the interest rate

With many debt consolidation loans, the interest rate is fixed for the term of the loan. This means that the amount you will need to pay each month will always be the same. For many people, this makes it a lot easier to budget the loan repayments around their other outgoings and makes planning their finances much easier. There are no surprises, and as long as you don’t borrow any additional money and stick to your budget then you will be able to consistently afford to repay your loan.

Lower interest rates

Chances are, the debt consolidation loan will work out to provide a lower interest rate than your other existing loans – although this may be a bit tricky to figure out, as trying to understand if several different loan amounts at several different interest rates provides a lower overall interest rate than the consolidation loan. There are calculators out there that you can try such as this one from The Guardian.

It may instead be better to look at the overall monthly repayments and tot up the amount you are currently repaying and compare it to the amount you would be repaying with the consolidation loan. If you are in it may be wise to seek financial advice.

Unsecured Consolidation

If you take out an unsecured consolidation loan then you will not be at risk of losing your home should you fail to meet the repayments. Of course, there would be other negative impacts on your credit, in terms of fines and additional interest charged and potentially legal action – and you should never borrow money if you aren’t certain you will be able to repay the debt – but knowing that your home would never be directly at risk may be extremely reassuring to many.

Providing a path to being debt-free

By consolidating – provided you do not take out any additional credit – you will have a clear end date to becoming debt-free. Many people find that this having a fixed end date is extremely motivating in terms of helping them manage their money better.

The Cons

It doesn’t necessarily resolve the root cause

Debt consolidation is probably best approached with a view to a wholesale change in your money management attitude. The loan will help solve your short term issues and get you debt-free (as long as you stick to the plan) but if you don’t address the actions and behaviours that got you into debt in the first place then it may just be a sticking plaster for a much bigger problem.

Remember – there are a number of UK charities that can help you with debt advice including stepchange.org, nationaldebtline.org and debtadvicefoundation.org.

It could cost you more

As discussed above – just taking a debt consolidation loan doesn’t in and of itself doesn’t necessarily mean you will pay less overall. Depending on the interest rate and the term it could end up costing you more overall, even if your monthly repayments are lowered. For this reason, you need to carefully assess the options and spend some time working out which option is going to be best for you. As always, if you need help here and aren’t sure which route is going to be your best option, seek help from one of the charities mentioned above.

Sources: Credit Karma, Money.co.uk, Growing Power

Managing Your Finances as a Couple

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If you and your partner live together, then you will have bills to share. Rent/mortgage costs, energy bills, water bills, food costs – all of these are essential payments that you need to make. But is it better to manage your money separately, or pool your finances? This article attempts to help you decide which money management method is right for you.

Important Note:

It should be said upfront that there is no ‘correct way’ to manage your money as a couple. What may work well for one couple, may not be a good solution for another.

The advice given here should be taken as a starting point – but you and your partner should discuss the options suggested below and agree which you are both most comfortable with.

The 4 Ways of Managing Money as a Couple

There are essentially 4 different ways couples can approach money management. Which of these approaches you go for is up to you and your partner:

  1. Combine everything and manage the whole pot as a couple
  2. Keep everything separate and manage your money individually
  3. The higher earner pays a greater share
  4. A hybrid approach where some money is kept separate and some money is pooled

Each of these approaches is discussed in a little more detail below.

Combine everything and manage the whole pot as a couple

This involves paying both of your incomes into a single joint account and paying for everything out of this account. Rent, bills, food – as well as individual purchases such as clothes, nights out or subscriptions.

Managing your money in this way is beneficial in several ways. Firstly, you can both view the balance at any time, you can both see everything that either of you is spending – there are no secrets! It also makes paying bills nice and easy as there is no dividing up the bills and working out if each partner has paid their half on time.

But this method can also have it’s difficulties. A couple of things to look out for:

  • You should agree a maximum spend limit. If one of you goes ahead and drops hundreds of pounds on an item without the others permission then it’s not going to end well.
  • You should ensure ahead of time that you both have compatible spending habits. If one of you likes to regularly spend a lot of money on non-essential items, then it is likely that the other partner is going to be resentful of that fact.

Keep everything separate and manage your money individually

Keeping your money separate means you won’t require a joint account – you each have your own bank account and then any bills that need to be paid are split – with you paying your half and your partner paying their half. Making this work requires:

  • Good communication and forward thinking. You’ll need to discuss money regularly to ensure you are keeping on top of the bills and each person has paid their share. You will also need to keep on track of what money is coming in and going out.
  • Responsible Spending. You both have a responsibility to pay bills together now. If one of you splashes out and haven’t got the funds to pay the bills, the other one is going to be left to pick up the tab. Ensuring you are spending your money responsibly suddenly got a while lot more important.

The higher earner pays a greater share

If one of you is earning significantly more money than the other, then it may make sense for you to split your bills, such that the higher earner pays more and the lower earner pays less. For example, if you earn £25,000 and your partner earns £15,000 – then you could split all of your bills in the same ratio (5:3) meaning that you would pay five eighths of the bills and your partner would pay three eighths.

To make this work, you should:

  • Agree ahead of time what expenses are to be split in this way and what expenses are to be split 50:50.
  • Ensure that both parties are completely happy with the arrangement.

A hybrid approach where some money is kept separate and some money is pooled

The final approach is to open a joint account, into which you each pay a certain amount of money each month – but also keep your individual accounts.

The joint account could then be used to pay for bills, food etc. but you each retain some autonomy over your spending. This may be the perfect balance for some people between easy budgeting, whilst still retaining some financial independence. Some points to consider:

  • Agree how much you will each contribute into the joint account every month. It may be that you each contribute the same amount, or you may decide that one of you (the higher earner) contributes a little more. Either way, you should ensure the total figure is sufficient to comfortably cover your bills.
  • You should decide which expenses will be paid out of the joint account. Is it just the rent, or will you also be paying for utility bills and food using this money?

What to do if one of you is overspending

If one of you isn’t managing your money particularly well, is overspending and is struggling to pay the bills, then it can very quickly cause high tension in your relationship. The below resources may help you:

If debt is a problem for you or your partner, you could consult one of the UK’s debt charities such as https://www.stepchange.org or http://www.debtadvicefoundation.org

You should also know that being financially linked to someone with a poor credit rating can also negatively impact your credit rating and make applying for credit difficult in the future.