What Are Debt Consolidation Loans?
Loans designed to allow you to pay off existing debt and replace it with a single new loan are called debt consolidation loans. The idea is that instead of several expensive debts, you only have one monthly payment left with a single lender.
Debt consolidation loans can also save you money if the new loan has a lower APR than your existing loans.
What Kinds of Debt Consolidation Loans Can I Get?
There are two types of debt consolidation loan; secure and not secure.
Taking out a secured debt consolidation loan means that the amount you borrow is secured by an asset, usually your home. If you don’t pay back the loan, the lender has the right to claim it against the value of your property. This means that you could lose your home, but the lender is more confident that the money they lend you will be paid back.
An unsecured debt consolidation loan is not secured against your assets. If you don’t pay off an unsecured debt consolidation loan, you are unlikely to lose your home. But you would hurt your credit rating and could lead to county court judgments against you and, ultimately, bankruptcy. You may be charged more interest for an unsecured loan because the lender is less likely to be repaid.
Why should you consider a debt consolidation loan?
If you’re struggling to manage multiple debts, a debt consolidation loan can help simplify your finances and take control of your debt. The other ways that debt consolidation loans can help you are:
Reduce your monthly payments
Paying off debt with a debt consolidation loan can lower your monthly repayments. Debt consolidation allows you to pay off high interest debt, reduce what you owe each month, and potentially pay off your total owed sooner.
A debt consolidation loan can also be repaid over a longer term than some other debts. Taking longer to pay off what you owe could cost you more overall. But the debt consolidation loan repayments will come in smaller chunks.
Get your finances back on track
Debt consolidation can make paying off what you owe easier to manage. You will only have one debt consolidation loan to pay off, instead of juggling many demands for money. You can pay off a debt consolidation loan with a fixed payment each month. With respite and fixed reimbursements, you can reduce your expenses and better plan your finances.
Save on high interest charges
The cheapest debt consolidation loans charge much less interest than some other types of debt. Paying off high interest credit cards, overdrafts, or bank cards with a consolidation loan could save you money overall.
Rebuild your credit rating
Consolidating debt with a debt consolidation loan can be good for your credit history. It shows that you paid what you owed. You must also repay the debt consolidation loan on time every month and in full to qualify for it. Improving your credit history with a debt consolidation loan can help you access cheap loan deals in the future.
What Are the Risks of a Debt Consolidation Loan?
Consolidating debts with debt consolidation loans comes with risks.
If the debt consolidation loan is secured against your home and you default on your repayment, you may lose your home. If you don’t pay off an unsecured debt consolidation loan, you will further damage your credit history. Consolidate your debts, but don’t pay off the debt consolidation loan and you risk bankruptcy.
You can also end up paying more overall with a debt consolidation loan. If you pay off your debt in smaller monthly payments over a longer period of time, the total you pay off may be higher than if you pay off your existing debt faster.
When debt consolidation may not be right for you if:
Refunds are too large: If you can’t afford the new loan payments even with the cheapest debt consolidation loan you can get, there is no point in taking out a debt consolidation loan.
He can’t erase all your debts: If you can’t get a debt consolidation loan that’s big enough to cover all of your debt, debt consolidation may not be right for you.
How Much Can You Borrow With a Debt Consolidation Loan?
Debt consolidation loans will generally offer borrowers between Â£ 500 and Â£ 35,000. Some debt consolidation loans go up to Â£ 50,000.
Lenders will look at your credit rating. A good credit rating will allow you to borrow more and you will benefit from the best debt consolidation loan rates.
Your income and the amount of your other debts will be used to assess whether you can afford the repayments of a debt consolidation loan. Higher income and lower debts mean access to the best debt consolidation loan rates.
How Much Does a Debt Consolidation Loan Cost?
The amount you pay to take out a debt consolidation loan, like any loan, depends on the APR, or annual percentage rate, that is offered to you. Compare the APR when using debt consolidation loan calculators and debt consolidation loan comparisons to get the best debt consolidation loans that cover your needs.
The APR includes the interest rate on the debt consolidation loan and any fees that the lender will charge. When you pay off the debt consolidation loan, these costs will be included in your monthly repayments.
Debt consolidation loans generally have a higher APR than regular personal loans. So, borrowing using debt consolidation is more expensive.
Some personal loans charge variable interest rates. Variable interest rate debt consolidation loans can cost you more or less month to month. If you are worried about being able to afford higher repayments, or want the certainty of a fixed repayment plan, you should avoid this type of loan.
Apply for a debt consolidation loan
Before applying for a debt consolidation loan, there are a few things to consider:
- How Much You Should Borrow: A debt consolidation loan is only useful if you can cover all of your debts. Add up all of your remaining debts to determine how much you will need to repay. Be sure to include any fees you might be charged for prepaying your debts.
- How long you need to repay: The time you need to repay the loan partly determines how much your monthly repayment will be. The longer you take, the lower the refund will be. However, you will end up paying more interest over the life of the loan.
- The interest rate: The interest rate you are charged will affect the cost of your loan. Although debt consolidation loans generally charge higher interest rates than standard personal loans, it is possible to get a cheap debt consolidation loan if you have a good credit history.
What are the alternatives to debt consolidation loans?
Debt consolidation loans are not always the best option for your situation. That’s why it’s a good idea to consider other options for managing your debt. Alternative options may include:
0% money transfer card: These are credit cards that allow you to transfer money to your bank account for a fee and use it to pay off your debts. You can repay this card without interest until the interest-free period lasts.
0% balance transfer card: This type of credit card is useful for paying off credit card debt. With this card you can transfer your different credit cards to a single card and pay it off without interest