Being in debt can be stressful and if you have multiple debts it can be hard to keep track of your payments
Debt consolidation loans are there to help you manage your finances. Debt consolidation loans can make for simpler management of your outgoings, by rolling your borrowing into one, monthly payment.
Read on to explore further information about how debt consolidation works and if it could be an option for you.
What is a Debt Consolidation Loan?
A debt consolidation loan is a way of rolling together money you owe to different creditors, like personal loans, credit cards and store cards or from different lines of credit that may be with one lender (such as a credit card, loan and overdraft all with the same bank)– into just one loan. In turn, this means you can swap many monthly payments for just one, to a single loan provider. You don’t have payments to make on lots of different dates, which you may find less confusing and easier to plan for, though you’ll still have household bills to consider.
If you use a consolidation loan as a stepping-stone to really take charge of your finances, it can be seen as a responsible move, as paying off one of these loans successfully could help your credit rating. However, these types of loans only work well if you resist taking on other new borrowing and stick to a planned budget. Commitment to the cause is essential.
Debt consolidation loans: a summary
- Turn several loans or several different lines of credit into a single loan
- Unsecured or secured loan options
Some debt consolidation loans are unsecured while others are secured, which means you offer an asset such as your home or car as collateral to a lender. Unsecured loans are obviously less risky for you; we all need a roof over our heads. You may find that secured loans - sometimes called homeowner loans – are the only lending option open to you if you have a poor credit history. But losing your home if you fail to make repayments as agreed is really not something to be taken lightly.
Merging the money you owe into a debt consolidation loan could result in you having lower repayments to make each month. This could mean more money for paying bills or travelling to work, and depending on your circumstances it could take the pressure off. But those lower payments might also mean that you’re paying off your debt for longer, so becoming debt-free moves further off into your future and you pay back more overall. With this in mind, it’s important to consider the overall impact a debt consolidation loan could have on your finances.
Compare Debt Consolidation Loans
Comparing debt consolidation loans usually starts with comparing interest rates, because you want to know how much you’ll be paying for your borrowing. By merging your borrowing into one bigger sum to pay back, it’s likely you’ll have a longer payback period.
The result could be that even if the interest rates are lower than what you’re currently paying, you might end up having a larger amount to pay back in total. A loan calculator can help you add up your different debts and interest rates, to give you a total of your current lending. Then you can get a clear idea of how it would stack up against a debt consolidation loan.
Fees for Debt Consolidation Loans
Don’t forget to take into account any early repayment fees you might have to pay to existing lenders for settling your debts with them early. And when you’re choosing a debt consolidation provider, look out for charges and fees with them too.
Arrangement fees, late payment fees and overpayment fees can all add to your total and take the shine off if you’re ever in the position to make extra payments. If taking a debt consolidation loan means extending your period of borrowing, think about how you’ll afford those payments long term. Being frugal can be tough and the consequences of failing to make those repayments will have a negative effect on your credit score, particularly if the loan is secured against an asset, such as your home.
Unsurprisingly, the types of annual percentage rates (APRs) available to you will depend on your circumstances and creditworthiness, with better rates reserved for those judged by lenders to be a lower risk. Advertised rates aren’t available to all either. While 51% accepted for a loan will get the representative rate, 49% won’t, so it’s possible a loan provider could accept you for a loan but offer you a different APR. Always be clear what the offer on the table is, and how it stacks up against your existing deals.
Alternatives to Debt Consolidation Loans
If you’re in a bit of a sticky situation and using credit to spend on everyday things like grocery shopping and travel to work, we recommend that you seek free debt advice from charities like Stepchange, or the Money Advice Service.
Debt consolidation is just one way to get your borrowing back in order, and debt restructuring can be a better deal providing it leads to you paying less back overall. Other options such as IVAs and bankruptcy can have a long-term impact on your credit file. However, if you’re simply struggling to get a clear picture of your existing debts, some support from a debt charity might help you get your borrowing in order.
If you’d like to search for debt consolidation loans to get an idea of what’s available, head over to our moneymatcher and we’ll serve you up loans tailored to you. Our matcher uses a soft search, so it won’t harm your credit rating.
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