If you're juggling multiple debts, consolidating them into one payment can be a way to streamline your finances. However, with several options available, it can be difficult to know the best route to take.
The good news is that there are a number of different methods you can explore. In this blog, we’ll outline some of the most common approaches to debt consolidation, helping you understand which might be the most suitable for you.
Best ways to consolidate debt
There’s no one-size-fits-all solution when it comes to consolidating debt. The right option depends on your goals, borrowing needs, and whether you’re a homeowner. Below are some of the most common methods people use when consolidating debt.
Further advances
A further advance allows you to borrow additional funds from your current mortgage lender, on top of your existing mortgage balance. It can be a helpful way to consolidate debt, which may offer lower interest rates compared to other types of loans.
However, this option isn’t always available. Some mortgage lenders may not allow further borrowing for debt consolidation purposes, so you could be restricted. If this is the case, you might need to explore alternative options.
Remortgaging
Remortgaging involves switching your current mortgage to a new deal, often with a different lender, and borrowing extra funds in the process. This can allow you to consolidate your existing debts into one new, larger mortgage.
It can be a particularly effective method, especially if you’re coming to the end of a fixed-rate mortgage term. However, if you’re considering remortgaging before your current term ends, it’s important to weigh the cost of giving up the rate you’re already locked into, as doing so could end up costing you more in the long run. To add to this, you need to also look into whether you would incur any early repayment charges by doing so.
Personal loans
Personal loans are unsecured, meaning you don’t need to use your property or any other asset as security. They can be used for almost any purpose, including debt consolidation.
This option is typically quicker to arrange than mortgage-based borrowing and often comes with fixed monthly payments, which can help with budgeting. However, interest rates may be higher, especially if your credit score is less than ideal. Additionally, if you have complex circumstances, it can be much harder to get approved.
Secured loans
Secured loans are similar to further advances and remortgages because they are backed by a property, but they are taken out separately from your existing mortgage. By using your property as security, it can allow you to borrow larger amounts, often at lower interest rates than unsecured loans.
One of the main advantages is that you can leave your current mortgage untouched, which can be particularly useful if you’re currently on a favourable rate and don’t want to lose it. However, like any secured borrowing, it does come with the risk that your property could be repossessed if you don’t keep up with repayments.
Which option is best?
Choosing the best way to consolidate debt depends on your individual circumstances. Factors to consider include:
- How much equity you have in your property
- Your credit score and overall financial history
- Whether you’re comfortable using your home as security
- The total amount of debt you want to consolidate
- Your ability to keep up with repayments
Each option comes with its own set of benefits and potential risks, so it’s important to weigh them carefully. Taking the time to understand your choices can help you make a more informed and confident decision.
Summary
Consolidating debt can be a powerful way to simplify your finances and potentially reduce your monthly payments. However, there isn’t a single “best” option that fits everyone. The right approach depends on your individual financial situation, including your home equity, credit history, and comfort with secured borrowing.
Loans are secured against property. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
