What Is Debt Consolidation

Recent reports from the Department of Trade and Industry said that more Britons entered bankruptcy in the first quarter of 2007, as a result of increased pressure from high borrowing costs. UK consumer debt now stands at £1.3 trillion, a situation which becomes more difficult in the face of rising interest rates. As more people get into financial difficulties, one of the options they can pursue is debt consolidation.

Debt consolidation is rolling as much of your unsecured short-term debt as possible into one loan. If you have many different unsecured loans and credit card balances which carry high interest rates, debt consolidation can be a big help. This approach relieves you of being saddled with debt from multiple creditors. Aside from facing only one creditor and one payment each month, some other advantages are that debt consolidation loans are usually long term and the monthly payments are usually lower than your total payments before consolidation.

The most common debt consolidation technique is to roll the debt into a home owner loan. Your lender will pay off all your debts and, in return, you make a monthly payment to the new creditor. Once this debt consolidation loan goes through, you should remember to avoid new purchases using those credit cards that you have just paid off. Adding more debt to your existing debt stock would make the load too heavy to handle.

When you go into debt consolidation using a home owner loan, you are converting unsecured debt into secured debt. That is the main reason the mortgage interest rate is lower. You should be aware that most credit counsellors advise that you should not convert unsecured debt to secured debt. The reason is simple: if you should encounter financial distress and fail to pay a home owner loan, you would lose your home. But if you fail to pay unsecured debts, you may lose your good credit but you will still have your home. Following this rule would mean not using homeowner's equity to collateralize credit card debt.

It may also be possible to consolidate debt by applying for one new low interest credit card to which you can transfer all the balances of your old cards. Just so that they can get the business, new cards often reward you for transferring balances by giving an especially low interest on those transferred balances -- often as low as zero percent for several months, even up to a year.

Remember to make sure you freeze using the old credit cards after the balance transfer. Otherwise, despite the best intentions, you could find yourself with double the debt a few months down the road. And, as much as possible, do not charge anything else on the new cards. The payments you make for new purchases could be applied to the old debt instead, and the new purchases will accrue high interest.

If you still want to use a home owner loan for debt consolidation, it may be appropriate if most or all of the following factors are true in your case:

• Your credit card payments have been limited to only the minimum monthly payment required;
• Your credit card debt carries very high interest compared with what you could obtain for a home owner loan;
• You intend to pay back the home owner loan on a relatively short payment schedule, preferably 5 years but certainly no more than 10 years;
• You have an adequate and dependable source of income which can be used to repay the loan; and,
• You have made the adjustments to your lifestyle and personal finances necessary to ensure that you will remain out of debt.