DEBT SOLUTIONS

Debt Consolidation Loans

DEBT SOLUTIONS

Debt Consolidation Loans

What is a debt consolidation loan (DCL)?

A debt consolidation loan is a way of bringing together several different debts into a single, affordable payment.

This can be one way to pay off your credit cards, store cards, personal loans, and other financial products, by turning multiple debts into a single loan with a lower interest rate and a single repayment term.

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How does a debt consolidation loan work?

The concept of a debt consolidation loan is simple. It’s a new loan from one provider that allows you to pay off a range of debts using a single monthly repayment.

Bringing the debts together isn’t a way of making them disappear, but it can be a useful way of managing your finances and reducing your monthly outgoings.

With that in mind, it’s important that a consolidation loan is enough money to repay all smaller loans and payments.

Types of debt consolidation loans

Secured

Where the amount borrowed is secured against an asset such as your home. These are sometimes referred to as homeowner loans. You could be offered one if you owe a substantial amount of money or have poor credit history.

Unsecured

Where the debt isn’t secured against any other assets. You could consolidate up to £25,000 using an unsecured personal loan.

Do consolidation loans come with interest?

Consolidation loans often have a higher interest than those associated with your original debts, and it’s important to be aware that if you have a history of defaulting on repayments you will face high interest charges on any consolidation loan.

A debt consolidation loan may be the right solution for you if you have a stable income and good credit score, but if you’re struggling with unsecured debts on a low income, it could be worth exploring other options.

Am I eligible for a debt consolidation loan?

To be suitable for a debt consolidation loan, you’ll need to meet the following criteria:

  • You have a steady job and income.
  • You’re financially stable enough to cope with repayments, even if your circumstances change, for example if you fall ill or your interest rates increase.
  • You have a strong enough credit rating that you can get the best rates.
  • You haven’t consolidated any debt in the past.

If your credit score is poor but you are a homeowner, it could be an option to take out a secured loan against your home. It’s important to know if you do decide to do this, defaulting on your payments will put your home at risk. Lenders will decide whether to grant you a loan on an individual basis.

Before opting for a consolidation loan, you should get advice from a debt expert – there could be other ways to clear your debt.

Advantages of debt consolidation loans

  • Everything you owe is pulled into one place, meaning you only have one payment and one interest rate to stay on top of.
  • Consolidation loans are an informal solution, so they’re not recorded on a public insolvency register.
  • It may give you more time to repay your debts.
  • The amount you pay towards your debt each month may be reduced.
  • A debt consolidation loan will have a positive impact on your credit score – as long as you meet the monthly payments.
  • Your debts will be repaid at the end of the consolidation loan term, providing that you haven’t missed any repayments or accrued further unsecured debts.

Disadvantages of debt consolidation loans

  • Your debts must be paid in full, there is no debt forgiveness.
  • You may not be eligible for a consolidation loan if you have a poor credit score and lenders feel you don’t have enough income to make repayments.
  • Interest rates are not frozen.
  • If you opt for a consolidation loan you could pay more than if you’d handled the debts individually, as the loan is repaid over a longer term.
  • If you don’t keep up with contractual repayments, the lender can take action against you.
  • Your home could be at risk if you opt for a secured loan.
  • It may take longer to repay your debts than with alternative solutions.

Can I get a debt consolidation loan with poor credit?

Yes, debt consolidation is still available to people with bad credit. The people who benefit the most from debts consolidation are those who have several debts to multiple creditors, whether they owe money to the bank, on credit cards, or carry other personal loans they may struggle to repay.

Anybody who has this level of debt hanging over them is likely to have a patchy credit history, but lenders will still consider consolidation even if you have bad credit.

An important thing to note, however, is that the worse your credit is when you apply for a loan, the higher the interest rate on your loan repayments is likely to be.

Do debt consolidation loans hurt your credit score?

The purpose of consolidating debt – in other words, turning multiple debts into a single loan – is to help you get a handle on your borrowing, use that loan to pay all of your debts, and improve your credit rating in the long run.

That said, as with any formal debt solution, debt consolidation is likely to have an impact on your credit rating in the short term.

When you first apply for a loan to consolidate your debt, your credit rating will take a temporary hit because you are accessing a new form of credit. Once you begin to make payments on your new loan, and that money is put towards the rest of your borrowing, your credit rating will gradually rise again.

What is the best place to get debt advice about a debt consolidation loan?

If you are struggling to manage monthly repayments for credit card debts, payday loans, and other forms of borrowing all at once, taking the decision to to consolidate debt can be a useful option to help you get on top of things and establish a strong record of repayment with lenders.

That doesn’t mean it’s an easy decision to make. If you’re struggling with loan repayment and are thinking about ways you can consolidate debt, talk to Carrington Dean today on 0808 253 4082.

As Scotland’s debt specialists, we can offer you debt advice and help you set up a consolidation loan that simplifies your financial circumstances and helps you rebuild your credit.

Frequently Asked Questions

The best way to do this is to shop around for a consolidation loan that will help you to reduce your outgoings and manage your money better.

It is exactly as its name suggests, a loan that allows you to consolidate all your debt repayments into just one – often with better rates and a longer repayment term.

In short, yes. But unlike some other debt solutions, it can actually help to boost your credit score by reducing the number of credit accounts you have on your file.

However, if you continue to use the credit after paying it off or are late with your consolidation loan repayments, this can then damage your credit score. 

Work out how much you need to borrow to cover all your debts, including any early settlement fees or charges you will incur, and how long you need to pay it back.

It’s best to then shop about for the best rates and pick the loan you feel is best for you before applying.

By design, debt consolidation should save you money on your debt repayments, as you’ll clear the balances in one go, avoiding years of interest. However, whether you save money with your loan repayments is dependent on the loan you apply for.

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