“It was a warm sunny day when I poured coffee into my black mug and sat at the table,” recollects Sarah. “I was at a loose end those days. I would spend a few hours in finding a job. I owed a personal loan worth £5,000 and had to take out an unemployment loan worth £750. I might not have needed an unemployed loan if my husband had not been on pay cut. I took a lot of trouble to make do with what I had. Unfortunately, I soon found that my savings vanished, and I was in the red. I did not get worthwhile support from lenders. Finally, I had to rely on making minimum payments. Accrued interest on unpaid balances kept the debt spiralling up. Then, my husband recommended I try merging my outstanding balances. ‘Perhaps this could help,’ said he. Luckily, I got the nod for the one.”

“From my experience, I can say that you cannot hang your financial irresponsibility on your lender,” says Sarah. “You should take account of unforeseen situations like job loss so you do not have struggles to settle your accounts.”

Mergence of outstanding debts is a common method to clear your debts when you have multiple loans. “But you will need a good credit score,” said Blake, the financial advisor of CashFacts. “Although some lenders may provide you with a debt consolidation loan with bad credit, interest rates will be quite high. Chances are you find yourself on the edge of the abyss.”

The two most common methods that people use to deal with their struggles with payments

“Debt consolidation” is an umbrella term. It is not a particular type of loan you will exclusively get from your lender. In most common circumstances, people get two types of loans when they are struggling with the payments of multiple debts.

• Unsecured loans

Unsecured loans are the preference of many borrowers when they have to pay down the following types of bills:

• Unexpected medical bills
• Car repairs
• Utility expenses
• A sum of money borrowed from a lender or a friend

Your lender will not lend you more than your outstanding balances. With the help of such loans, you will settle all your accounts at once. Now, you will be left with only a personal loan that will be required to be settled over a period of months. “You will find it now easier to manage your debt even though it has not been reduced,” said Blake, “because you will be making payments in fixed instalments.”

Your instalments will be affordable when your credit report is up to scratch. “You should try to consolidate your loans as soon as you start facing problems,” says Blake. “Once you have missed a payment, your credit score will be lowered, lowering your chances of getting the nod for an unsecured loan.”

• Credit card balance transfer

“Credit card balance transfer is an option available to those who are struggling with payments of credit card bills,” said Blake. “It is expensive to have a balance on your credit card. Credit cards charge interest rates per day, so the balance will quickly go up.” Many borrowers fall into credit card debt within a few weeks of their defaults.

It will be recorded in your credit report and your credit score will go down. “Credit card debt can take a toll on your credit file quickly,” said Blake. “You will not be able to avail yourself of affordable deals.”

‘Credit card balance transfer’ allows you to move your outstanding balances into a new card. “As you will receive a new credit card at a lower interest rate,” said the financial advisor, “you will save a lot of money.” Some ‘balance transfer credit cards’ come with an introductory period that allows you to settle your whole account without paying any interest. You will end up paying more money if you fail to close your account within the introductory period.

Make sure to keep your credit score in a good condition while using this funding alternative.

Two methods that you have not ever considered to merge your loans

Both aforementioned options are suitable for people with a good credit history. Lenders will either turn you down or charge very high-interest rates. You should consider the following two ways to deal with your mounting debt.

• Release home equity

Equity is the difference between the mortgage you owe and the market value of your house. “The equity you have in your house will be served as collateral, so you can release equity up to 80%,” said the financial advisor. “You can release equity when refinancing your mortgage or taking out a second mortgage. You can use the extra funds to pay off your outstanding balance.”

• HELOC

Home equity line of credit (HELOC) is also a common way to pay off your overdue debt,” said the financial advisor. “You can use up to 80% of the equity. Interest rates will be lower because your equity will be considered collateral.” It is like a revolving credit card, as you can withdraw funds as you need. However, a line of credit is never available for a lifetime.

Things to keep in mind while using consolidating options

Here are the things to keep in mind while using the aforementioned options for consolidating your overdue debt:

• You will have to research about the interest rates. There is no guarantee that every lender will offer affordable interest rates despite a good credit record.
• Do not fall into the trap of choosing the lowest monthly payment plan as it will increase the total cost in the form of interest.
• Do not borrow more than you need.
• Make sure you will not need to rely on a loan to meet unexpected expenses unless the consolidating loan is paid back.
• After the settlement of the debt, take break from borrowing. Do not use very bad credit loans. Instead, improve your credit score.

The final word

You do not need to simply rely on unsecured loans when you are looking to merge your overdue accounts. Home equity and HELOC may be better alternatives. Consider your options carefully before making a decision.

Talk to a financial advisor if you are in facing problems in tackling your debts. They will assess your financial situation before coming up with any strategy.