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Start the year fresh: consolidate your debts

Start the year fresh: consolidate your debts

Category: Loans
02/01/2018

A new year provides the perfect opportunity to take a closer look at your finances and see if you could change things for the better. Especially if you've been putting your Christmas purchases on a credit card, now could be the perfect time to make a plan, before your borrowing can get out of hand.

Dealing with your debt

If you've put your festive spending on a 0% purchase credit card, you may have quite some time to pay off the debt before you start paying interest on it. You'll still have to remember to keep up with minimum repayments – and a little over if you can afford it – and it might not be a good idea to keep spending.

If you're in a position where you've got debt on multiple credit cards and you're having to pay interest, you may want to consolidate it all into one affordable unsecured personal loan to minimise the amount of extra debt you'd have to pay back. Luckily, our research shows that the average rate of interest on such a loan for £10,000 over five years sits at 4.6%.

What's more, borrowers could get a loan charging as little as 3%, subject to status, if they go for a Best Buy deal. These loans not only allow you to consolidate your debts into one affordable loan, which shouldn't tempt you to keep spending as much as credit cards may, they also guarantee that the debt is cleared by the end of the term – as long as you keep up with your repayments.

Is an unsecured loan for me?

As with all financial products, they offer advantages as well as disadvantages. Rachel Springall, finance expert at moneyfacts.co.uk, explains the main thing to keep in mind is that "with a credit card, borrowers can change their repayments from a fixed payment to the minimum repayment in times of crisis, but with an unsecured personal loan borrowers must be sure to keep up with the set repayment each month."

This does mean that "a loan could be perfect for those who can't resist the enticement of using more of their credit card limit and who need a sensible product to pay back their debt over a fixed term," says Rachel. Another important factor may be the rates involved, which is why its good news that unsecured loans currently offer competitive rates, down from a year ago across most loan terms.

Jan-13 Jan-17 Jul-17 Jan-18
Average Loan APR at £5K 11.7% 7.4% 7.3% 7.2%
Average Loan APR at £10K 7.0% 4.6% 4.5% 4.6%
Average Loan APR at £20K 8.8% 5.3% 5.1% 5.1%

The above table further shows that it may be a good idea to revisit your old loans as well, as chances are the interest rate charged to you back then is much higher than what is on offer today. Looking back just five years ago shows quite a difference.

"Before applying for a new loan to transfer debts into, however, customers would need to work out what any early repayment charge may be and see whether they would still be better off switching," warns Rachel. "It's also worth keeping in mind that out of all successful applicants, a minimum of 51% are offered the advertised rate."

Where should I look?

Rachel further warns those considering a loan to look away from the high street: "Make sure to shop around, because non-high-street loans are typically cheaper; the lowest rate on the market today on a £5,000 loan over five years comes from Hitachi Personal Finance at 3.4%, while the lowest high street bank loan for new customers is priced higher at 4.5% from Santander."

When it comes to loans, the main value that can be gained from them is the rate, so whether it's a high street loan or a less well-known provider, see who sits at the top of the Best Buys for the amount you're looking to borrow, and don't forget to make sure your credit score is up to scratch before you apply.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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