When taking out a debt consolidation loan, people are usually looking for a personal loan with an amount that is big enough to clear all of their existing debt at once. This type of loan can be used to clear most debts - such as credit cards or even other loans. Of course, after consolidating these debts, the only thing left to pay off would be this loan. Debt consolidation is an attractive way for individuals who have a reasonable amount of debt, owed to more than one creditor, to manage and ultimately clear it. It is considered much easier to handle because instead of making multiple payments, of varying amounts, to a bunch of different creditors who may each be charging different interest rates, you are able to just keep track of one single payment. Similar to any other loan, there are pros and cons to take into consideration:
- Debt consolidation allows you to sit back and take a breath. By consolidating your debts into one, it’s much easier to manage your finances and choose how you’ll clear your debt.
- This type of loan can also help you save you money in the short term and the long term. In short term, you might end up paying less each month than you have been doing, keeping more money in your pocket. In the long term, you might get a better interest rate and pay less over time.
- Your credit could improve - once you are able to pay off other credit cards and loan accounts, lenders can see that you are managing your finances responsibly. You could see your rating go up, if you maintain your payments to the debt consolidation loan.
- Debt consolidation loans especially, can be more difficult to get if you have less than perfect credit.
- Taking out a debt consolidation loan is not the solution to all your debt, as you’re not removing it completely, you’re mainly making it easier to deal with. If you don’t pay off your existing debt with the new loan, you’ll continue to pay these creditors at the same time as repaying the newest lender and you’ll find yourself in a much more difficult situation than where you began. Because of this, you could consider alternative options before doing so.
- The term of the loan could be longer than the terms of debt obligations that you consolidated. This may cause the total interest cost to be greater than it would have been on the individual debts, even though the monthly fee is lower.
Before you apply...
Begin by working out how much money you owe: add up all the debts you would like to consolidate and include any extra charges you might have to pay off, (this may include fees for early repayment of some of the existing borrowing so check this before attempting to clear debts before the end of the term you originally agreed), then this will be the amount you need to borrow. You should then decide how long it will take for you to repay the money.
Bear in mind that the longer you take to pay the loan back, the lower your monthly payments are likely to be. However, if you borrow for longer you will pay more overall. Lastly, check out some comparison sites and search for the best interest rate. For example, SupaCompare.co.uk has options. Making sure you look for the lowest APR would be a good idea for starters.
Adding to that, a debt consolidation loan may not be the best way to tackle your debts. It’s important to consider some alternatives that could be:
- 0% money transfer card - These cards are used to move money into your bank account. You may have to pay a relatively small transfer fee that’s usually a percentage of the amount you request. However, you can pay this off with the total balance over time interest free. The length of that interest free period depends on the deal you get from the card issuer.
- 0% balance transfer card - If you have credit card debts, you could use a balance transfer card to move what you owe to a new card. Similarly, you may also be charged a relatively small transfer fee that’s usually a percentage of the amount you request that can be paid back interest free for a set time. The length of that interest free period depends on the deal you get from the card issuer.
FAQ’s about Debt Consolidation loans
Do I have to pay off all of my debts with the loan?
No, you can choose which debts you’d like to clear. But, if you keep any open you have to show that you can afford to pay them back alongside any new loan.
Will the money be paid directly to my other lenders?
No, it is usually paid to you and then you need to pay them off separately.
Does the lender have to run a credit check?
Yes, lenders will check your credit record to determine whether or not you qualify for the loan. Please note that this is the case for any loan and you should be wary of lenders that advertise an opportunity for a ‘no credit check loan’, as this is a vital part of the decision. If you are worried about your credit score, get access to your free*, personal report here: Credit Knowledge
What happens if I cannot make my repayments?
You may be charged a fee and your credit record will be damaged, causing serious financial issues. If you ever get into this situation, contacting your lenders at the earliest possible time is advisable because many are able to agree a compromise to get you through a difficult period, although they’re not obliged to.
*Monthly fee applies after free trial