Saving money is an important objective for all of us. So too though, is being debt free. Repayments on high-interest loans and credit cards can be crippling, and can prevent us from spending money on the things in life we really want to. But rather than scrambling to save every penny you can to cover monthly repayments, what if there was a way of reducing these interest costs at source?
As it turns out, there is, and it’s quick and easy too. Debt consolidation loans have actually been around for ages, but surprisingly remain a bit of an unknown quantity. The theory behind consolidating debt is very simple: Take out a single, low cost loan to pay off all your outstanding credit card and high interest debts, leaving you with just a solitary repayment to make each month.
It saves you the hassle of juggling different debts, with different repayment amounts and different repayment dates. But best of all, because the loan you are paying off has a lower APR, it saves you money – straight away!
The emergence of alternative finance
So where to find this golden goose to consolidate your debt? After all, the exercise becomes pretty pointless if you aren’t able to find a loan that is significantly cheaper than the ones you were paying off originally. However, the good news is that there are many providers who can help you, and they’re a whole lot easier to deal with than banks and other heavyweights on the high street.
Indeed, alternative finance providers have added some much-needed diversity and competitiveness to the consumer credit landscape, and getting your hands on a low interest loan has never been quicker and easier.
Perhaps the providers who most grabbed my attention when browsing through price comparison sites were peer-to-peer lending (P2P) platforms; mostly because they were near the top of the list each time. The business model for these online platforms simply involves allocating funds from consumers who choose to lend their money (as opposed to putting it in the bank) directly to those who are after a loan. There is no middleman who profits in between, simply a streamlined process in which both borrower and lender benefit from good value.
The platform mediates between the two parties, and facilitates proper controls such as credit checks on loan applicants to ensure that the relationship functions smoothly, and that the chance of borrower default is diminished. However, for this service, only a nominal fee is charged, and the APRs offered by P2P platforms are highly competitive as a result, as are the returns received by lenders.
Furthermore, you as the borrower have a great deal of flexibility in terms of how much you want to borrow (£1,000 – £25,000) and the loan term (1 – 5 years). In addition, you’ll find that certain P2P lenders like Lending Works even give you the chance to make overpayments and early settlements without incurring any fees, allowing you the chance to eliminate your debt quicker.
How big a difference can debt consolidation make?
First things first though… The emphasis is on finding that money-saving loan, so I ran a little experiment to see just how big a difference consolidating your debt can make. I did a comparison of a £5,000 loan over 3 years from Lending Works, using their Representative APR of 6.4%, versus paying off a credit card for £5,000 at an APR of 17.8%*. This is what I discovered:
That’s a saving of over £1,200 on the total amount paid off! These figures are obviously subject to change, and the above is just a representative example. However, it clearly demonstrates the kind of money you can save by taking control of your finances and consolidating your debt.
So if high interest loans are getting you bogged down, don’t be disheartened. Have a look online, and see for yourself how many different providers there are out there which can offer you a convenient loan at an interest rate you deserve. Your research may well lead you to a peer-to-peer lender; or it may not. But either way, you’ll be able to crack a smile knowing that you are taking proactive steps to becoming debt free.
*The table uses the average 17.8% APR on purchases reported in the UK Cards Association
Quarterly Market Trends Q4 2014 Report. Specific card issuers may offer different APRs.
This blog post is kindly sponsored by Lending Works.