Debt Consolidation

If you’re paying off a number of different loans, debt consolidation is one option available to you that can make it far easier to manage your finances – as all debt repayments are combined into a single monthly payment. However, there are various different types of debt consolidation loans out there and, depending on your personal circumstances, it may or may not be the right solution for you.

This fuss-free guide offers comprehensive insight into what debt consolidation loans are, who they’re suited to and the small print that goes with them, so that you can make an informed decision regarding your personal finances.

Consolidate your debts with a single loan
Consolidate your debts with a single loan

What is a debt consolidation loan?

A debt consolidation loan is used to combine a number of different debts into one payment. Under the right circumstances, consolidating debts into one manageable loan payment can be an effective solution, as this makes it easier to monitor loan repayment outgoings and can significantly reduce the amount you pay back each month.

However, it’s important to be aware of the two basic types of consolidation loans on the market: secured and unsecured:

  • Secured debt consolidation loans are typically given to individuals looking to borrow a large amount of money, or for those with low credit ratings. These types of loans are secured against one of your assets – typically your home – and if you’re unable to repay the loan, these are potentially at risk of repossession
  • Unsecured debt consolidation loans aren’t secured against personal assets and are usually offered to individuals borrowing smaller amounts, or those deemed low risk for missing payments

The key considerations

Debt consolidation isn’t necessarily the best solution for everyone, so, before you consider applying, it’s recommended that you seek professional financial advice and consider all of your options.

When contemplating a consolidation loan, always have in mind that you’ll need to be able to comfortably afford the monthly repayments – even if your situation changes. Falling ill, losing your job or rising interest rates could cause you to fall behind on payments or default on the loan altogether, which may put assets at risk, if you have a secured loan, and negatively affect your credit score.

Also, take into account whether consolidating your loan outgoings into one payment will actually mean savings for you. It should not only reduce monthly payments, but also allow for the cost of additional fees and charges for arranging the loan itself and any early repayment fees on existing debt.

In addition, it’s essential that this solution helps you to become debt free in the long term, that the payments aren’t so high that you have to dip back into borrowing to make ends meet, and that the overall amount payable isn’t any more than you’re currently set to pay. And, naturally, it goes without saying that the amount borrowed should cover all of your debts, otherwise you may find yourself in a similar situation further down the line.

The benefits

Combining all of your credit card payments, store cards and loans into one manageable sum does offer borrowers some benefits, which include:

  • Lower monthly payments – With many borrowers only able to afford the ‘minimum payment’, this can mean that they’re not actually chipping away at the loan, but rather just paying off the loan interest. However, switching to a different loan term can mean you receive better repayment terms, with lower monthly amounts that actually contribute to paying off the debt and the interest
  • Reduced interest rates – If you have outstanding store cards and credits cards, the interest rates applied can be considerably higher than on a consolidation loan, so there may be savings to made
  • Improved credit rating – If you’re looking to boost your credit rating, successfully repaying and maintaining a debt free record can go some way towards improving your credit score – should you wish to apply for a loan or credit card in the future

The risks

Understandably, taking out any kind of loan comes with an element of risk, and debt consolidation loans are no different. However, the levels of risk will vary depending on your personal situation.

For instance, if you’re looking for debt consolidation with a bad credit rating, you may find that the risks involved are higher. In many cases where individuals are deemed as having a bad credit rating, they will only be eligible for a secured loan. Therefore, should your circumstances change and result in you defaulting on your loan agreement, these assets may be repossessed by the lender.

Borrowing a large amount of capital to pay off a myriad of debts can be an effective way to secure a more attractive interest rate and reduce your loan outgoings each month

Borrowing a large amount of capital to pay off a myriad of debts can be an effective way to secure a more attractive interest rate and reduce your loan outgoings each month – but this may also mean you’re in debt for longer. Before committing, be sure you’re completely happy with the agreed term and take the time to read the small print – looking out for additional charges for early repayment, or one-off contributions that can further reduce the amount owed.

Being in debt can feel like a desperate situation, and the need to find a quick solution may appear to be applying for as many loans as possible, but this can, in fact, hinder your chances of having an application accepted. Applying for too many loans over a short period of time can negatively impact your credit score, indicating to lenders that you may be struggling financially – so shop around first and choose wisely when submitting a loan application.

If you’re struggling to cope with your existing debt, a debt consolidation loan could be a suitable option – however, there are other alternatives, too. Visit our blog, where you’ll find articles covering financial news and tips to help you make an informed decision and take a big step towards becoming debt-free.