Debt Consolidation Loans


Debt Consolidation Loans

What is a debt consolidation loan?

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 and personal loans.

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, however, it can be a 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.

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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

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 these criteria: 

  • You’ll have a steady job and income so you’re able to manage repayments.
  • You’ll need to be financially stable enough to cope with repayments, even if your circumstances change, for example if you fall ill or your interest rates increase. 
  • You should have a strong enough credit rating that you can get the best rates. 
  • You won’t have 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 to consider. 

Advantages and disadvantages

Advantages of debt consolidation loans

  • Everything you owe is pulled into one place, meaning you only have one payment to stay on top of and one interest rate.
  • You’ll make one monthly payment, rather than juggling several at a time.
  • 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.

You could write off up to 75% of unsecured debt with our debt assistant.

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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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