Debt consolidation usually involves taking out new credit in the form of a debt consolidation loan to pay off existing credit. This allows you to pay off your debts in just one monthly payment which is often lower than what you’re currently paying.
What is debt consolidation?
If you’ve got lots of different debts and you’re struggling to keep up with repayments, you can merge them together into one loan to lower your monthly payments. This means you could potentially save a lot of money in lost interest.
There are two types of debt consolidation loan:
Secured Debt Consolidation
A secured debt consolidation plan is where the amount you borrow is secured against an asset, usually your home. If you miss repayments, you could lose your home.
Unsecured Debt Consolidation
An unsecured debt consolidation where the loan is not secured against your home or other assets.
Can I get a debt consolidation loan with bad credit?
Your lender will decide the terms and APR it offers after a look at your credit score, and if you have bad credit they may offer you a loan secured against your car or house.
What’s the difference between debt management and debt consolidation?
Debt consolidation and debt management are two different things. It’s easy to get confused by the terminology used when trying to sort out your debts.
Debt consolidation involves taking out new credit to pay off your debts.
Debt management is where you, or a debt management plan provider, negotiate affordable payments with the companies you owe money to
How to get a debt consolidation loan
Consolidating debts isn’t the best solution for everyone. If you do decide to take out a debt consolidation loan, you’ll only have one company to pay back each month. However, you may be making large payments to that company every month and over a long period of time, which will result in you paying more over the term of the loan. You’d need to check if you’re eligible for a loan that’s affordable for you.
To see if a debt consolidation plan is for you. Firstly, work out how much you owe and how much you’re currently paying out each month. Next, get in touch by filling in the contact form and we will help you find the right loan or debt plan for you.
Cons of a debt Consolidation
Missed payments have consequences
If you miss a payment you will hit your credit score if you don’t meet your responsibilities.
Set-up fees can be pricy
As your existing creditors may charge you for settling up early or for transferring the balance of your loans
You may lose your home or car
If you can’t keep up with your repayments on a secured loan, your collateral may be repossessed
Other options are available
Including 0% balance transfer credit cards, which might suit someone who has more modest debts
Pros of a debt consolidation
Reduce monthly repayments,
Especially if you have quite a few outstanding debts all accruing interest
Lower overall interest
Because debt consolidation loans tend to have lower APR than payday loans or some credit cards
Easier to keep track of your debt
Because managing one repayment a month is much more straightforward.
Boost your credit score
As it’s easier to make one monthly repayment on time and in full.
There may be a range of debt solutions that could be more suitable for your circumstances. Please look at the different options available on our site.
When should you consider debt loan?
Consolidating debts only makes sense if:
- any savings are not wiped out by fees and charges
- if you can afford to keep up payments until the loan is repaid
- use it as an opportunity to cut your spending and get back on track
- end up paying less interest than you were paying before and the total amount payable is less (it could be more if you repay over a longer period).
Before you choose a consolidation loan, think about anything that might happen in the future which could stop you keeping up with repayments.
For example, what if interest rates go up, or you fall ill or lose your job?
If you can’t stop spending on credit cards, for example, because you’re using them to pay household bills, this is a sign of problem debt.
You should get free advice before taking out a consolidation loan.
When debt consolidation doesn’t make sense
- you can’t afford the new loan payments
- The consolidation loan can’t clear all your debts
- you end up paying more overall (due to the monthly repayment being higher or the term of the agreement being longer)
- Rather than get a new loan, you may just really need help sorting out your debts rather than a new loan – a debt adviser might be able to negotiate with your creditors and arrange a repayment plan.
Get in touch to learn more about how we can help.
For more information or to discuss a debt management plan and also any other debt options available to you, please get in touch.
Finding the right debt solution for you
If you’ll save on interest and fees over the course of a consolidation loan, then it may be a good option for you. If it looks like you won’t save on interest and fees over the course of the loan it may be worth considering whether the benefits justify the extra cost.
However, don’t worry if you can’t find the right consolidation loan for you. There are more options available to help you with your financial debt.