It’s time to rethink debt consolidation

“Debt consolidation in this way can offer borrowers a vital lifeline by reducing their monthly interest payments and giving them greater control over their monthly finances.”

To combat this inflation, the Bank of England has used its most important tool – interest rates. The bank’s recent increase in the base rate from 0.75% to 1% means interest rates are now at their highest levels since 2009.

Each item that goes up in price further strains the pockets of overstretched consumers. This comes against the backdrop that many are already feeling the strain as we emerge from the economic devastation of the Covid pandemic.

Research from the latest Pepper Money Adverse Credit Study found that 81% of people with negative credit scores said that adding £100 to their bills would significantly affect their finances.

Additionally, nearly a third (32%) of people with negative credit scores said they had increased their debt over the past 12 months and that the cost of servicing debt will only increase as the cost of borrowing increases.

Unfortunately, there is little people can do about the cost of essential commodities, while they can take action when it comes to managing their monthly expenses to service debt, which these recent rate hikes are likely to make more expensive.

One way to do this is to pay off unsecured debt and revolving credit by increasing secured borrowing, either through a debt restructuring, another advance, or a second debt mortgage.

There are always considerations of converting unsecured debt into secured debt and possibly extending the term over which the debt is repaid. But in the right circumstances, consolidating debt in this way can provide a vital lifeline for borrowers, reducing their monthly interest payments and giving them greater control over their monthly finances.

Consolidating revolving loans in this way not only offers customers a way to reduce their monthly expenses — it can also provide them with a realistic path to debt freedom, since the balance will eventually be paid back when all payments are made.

For clients who choose debt consolidation, the manner in which they do so will depend on their own circumstances and requirements. Where speed and flexibility are important considerations, a second encumbrance mortgage can prove a good option, with approvals available within 24 hours and an LTV of up to 80%.

There are so many potential benefits from debt consolidation for so many people, especially in the current economic environment, but the concept of debt consolidation remains shrouded in negativity and perceived as a desperate move by desperate people.

I firmly believe that this is a false and very harmful misconception. In fact, rather than being a desperate move, I think consolidating debt this way can be a very smart, proactive move to take control of spending and settle outstanding balances. After all, reducing the cost of borrowing is a smart financial move, and reducing monthly expenses to improve cash flow can have a very positive impact on the lifestyle of many families.

So I think it’s time to reconsider debt consolidation. Maybe we should even rename it to something like “proactive debt management“. Whatever we call it, there is no doubt that brokers currently have a huge opportunity to make a difference in the lives of their clients. Consolidating existing debt could help so many people cope with the rising cost of living. It’s time to make them aware of their options.

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