Debt Consolidation Loans
Debt Consolidation Loans
What is a Debt Consolidation Loan?
A debt consolidation loan is a way of compiling a number of different debts into a single affordable payment.
This is can be a method of paying off credit cards, store cards and personal loans.
The concept of a debt consolidation loan is simple. It’s new a loan from one provider that allows a 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 better managing your finances and reduce your monthly outgoings.
With that in mind, it’s important that a consolidation loan is sufficient 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
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 the likelihood this will be unlikely if you’re struggling with unsecured debts.
Am I eligible for a Debt Consolidation Loan?
To be suitable for a debt consolidation loan, you must meet the criteria below:
- Have a steady job and income to ensure you’re able to manage repayments.
- Financially stable to continually be able to cope with repayments should circumstances change such as falling ill or increases to interest rates.
- Have a good credit rating to enable to you obtain the best rates.
- You haven’t consolidated a debt in the past.
If your credit score is poor but you are a home owner, it could be possible to take out a secured loan against your home. However, this should be carefully considered as defaulting on payments will put your home at risk.
It’s important note that individual 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 better ways to clear your debt you haven’t considered.
Advantages & 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 to keep track of.
- You’ll only make one monthly payment rather than juggling several payments at one time.
- Consolidation loans are an informal solution and, as such, not recorded on a public insolvency register.
- You may have a longer period 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, permitting 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 period of time.
- 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 tat with alternative solutions.
You could write off up to 75% of unsecured debt with our debt assistant.
Frequently Asked Questions
The best way to do this is to shop around for a consolidation loan that will essentially help you to reduce your outgoings and better manage your money.
It is exactly as its name suggests, a loan that allows you to consolidate all your debt repayments into the just a single 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 amount 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 suited to you before applying.
By design, debt consolidation should save you money on your debt repayments as you will 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.