Debt consolidation loans

If you're looking to clear a debt or combine several debts into one payment, then a debt consolidation loan may help you sort out your finances.

How to put all your debt into one payment

Debt consolidation loans in the UK can help you combine debts into one manageable loan. Some people find it easier to concentrate on clearing one single debt rather than having to keep track of lots of different repayments. You may also be able to reduce the interest rates on expensive debts.

If you're currently looking to clear debt, or you are juggling payments to more than one lender, a debt consolidation loan could help.

Debt consolidation loans – how does debt consolidation work?

Rather than trying to pay off the minimum amount for each debt each month, a debt consolidation loan could reduce your debt to one manageable monthly payment, with a fixed date by when all your monies owed should be repaid. It could cost you less overall than repaying the individual debts at their own interest rates.

A debt consolidation loan could also reduce the amount of paperwork you are having to manage, which might help to reduce some of your money stress.

However, you need to look at all of the relevant issues as loan consolidation may not be right or available for you.

What are debt consolidation loans?

A debt consolidation loan will pay off your existing debts and transfer the money owed into one loan with one manageable, monthly repayment.

You will still have to pay back all that you owe, but with loan consolidation you may be able to reduce your monthly outgoings. You may also be able to pay a lower rate of interest or be able to spread the costs out over a longer time period.

If you are worried about your debts building up, are struggling to keep track of lots of different repayments, or you are finding it hard to pay the minimum on your debt each month, a debt consolidation loan might be a possible solution.

What are the benefits of a debt consolidation loan in the UK?

If you are careful about managing your spending, debt consolidation loans can help by:

• Reducing your monthly payments -

By spreading out the term of the debt you should be able to reduce your monthly repayments to a manageable level. Most people are often paying the ‘minimum payment’ allowed on the existing debts. This often just means covering the interest component of the loan while leaving the actual total amount owed unchanged.

By just making the minimum payment you are not actually clearing the bulk of the debt, just paying interest. This can make it very hard to pay off your debt over the long term.

• Improving your credit rating -

If you are able to pay off the loan and accrue no further debt, this will be seen as a positive impact on your credit rating. 

Your credit rating is a score based on your financial history and current borrowing. Your credit score is worked out by looking at several aspects of your financial history. These include, whether you have paid off debt in the past, whether you have missed any payments, how much you are borrowing, and whether you have made a lot of applications for credit.

A good credit score is important because it helps you get better deals on credit cards, loans, mortgages and other forms of credit, and it can also help you if you are applying for broadband contracts and other consumer services.

It is a good idea to check your credit report before you apply for a debt consolidation loan.

• Reducing the interest you pay -

If your debts are with store or credit cards that have a high interest rate then you will generally pay back less interest on your debt with a debt consolidation loan. This is because some credit cards can have very high Annual Percentage Rate (APR) interest rates. 

• A clear end date - 

With a debt consolidation loan, you agree on a target date by when all the money you borrow is paid off. This is better than having no clear idea of when or if you finally can wipe away your debts.

What are the drawbacks of a debt consolidation loan?

It may seem tempting to have all your debt in one place, and it can certainly help if you are finding lots of different debts overwhelming and difficult to track.

However, there are some disadvantages to a debt consolidation loan and it is worth bearing these in mind before you go ahead.

• A longer repayment period -

You may find yourself getting into debt for a longer period. This is because the various loans or credit card debt you already have will be consolidated together and your monthly payments may be reduced, so that you are paying back a smaller regular amount over a longer time. This could also mean you end up paying more interest overall.

For this reason, it is important to weigh up all the alternatives you could take to reduce your debts or help pay off your existing ones. It may be that you could ask your credit card provider for some breathing space to pay off your debt, or you might be able to transfer your credit card debt to a zero interest rate card to give you time to pay off the underlying loan.

• Problems in qualifying for a debt consolidation loan -

If you have a previous history of bad credit or large debts, a lender may only consider offering a secured loan.

This will require you using your property as security against the loan, reducing the lender’s risk. You need to be sure you will be able to cope with the loan repayment, as your house could be at risk if you default.

Should I get a debt consolidation loan?

Debt consolidation loans shouldn't be the first action to take against debt, especially if there are expenses and outgoings you can reduce or get rid of completely.

It is worth analysing your budget and looking at what you can afford to pay back on your current debts first. You may be able to reduce your non-essential spending and shop around for better deals on utility and other household bills.

You can ask a debt charity for help in order to reorganise your finances, prioritise your most important debts and help you work out a financial plan for paying off your most costly debts first. This may work better for you than a debt consolidation loan.

How do I get a debt consolidation loan?

To see if you're eligible for their loan, a lender will look at how much debt you have outstanding and your credit risk.

Today, many personal loans can be used to consolidate your debts. As with any other borrowing the lender will look at:

• the amount you want to borrow

• your credit history

• how long you need to repay the debt

If your outstanding debt is low and you have no problems with your credit rating, a personal loan could help you consolidate and reduce your debt.

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