Debt can be hard to keep track of if it’s spread out over different products, like credit cards, loans, store cards and overdrafts.
Knowing how much needs to be repaid when, and to who, can result in payments falling through the cracks and charges being issued.
A debt consolidation loan may make the process of paying off your debt simpler, but is it the right option for you?
It’s when you take out a new loan to pay off your existing debts, allowing you to make one monthly repayment to one lender, rather than multiple payments to different lenders.
It also means your debt will be subject to one singular lower interest rate, rather than a number of different ones, which can help you pay off your debt quicker.
Typically, they’re used to pay off credit card, store card, overdraft and existing loan debt.
For those with multiple debts owed to different lenders, a debt consolidation loan could make life a lot simpler.
There’ll be one lender to deal with, one repayment per month, one set of terms and conditions and one interest rate. This can help you keep on top of your payments and help minimise confusion as you haven’t got to keep track of different amounts of money leaving your account each month.
If you’re making minimum monthly payments on an existing credit card, it’s likely that you’ll end up paying way more than you borrowed, so clearing the debt in one go can help keep the cost down.
It can also be hard to keep on top of overdraft debt because you’re not required to make monthly repayments, so it can quickly get out of hand and charges can mount up.
Although specialised debt consolidation loans do exist, they’re best avoided. You tend to pay much more overall than you would with a personal loan.
The most important thing to think about before taking out a debt consolidation loan is why you’ve been struggling to repay your existing debt.
Although a consolidation loan may make it simpler logistically, your debt doesn’t decrease, and you run the real risk of having to borrow even more to cover the loan repayments.
If you can’t afford to pay it off now, what will change when it’s consolidated?
You really need to address why you’re struggling, whether this is because your income has lowered recently, or expensive bills are wiping you out every month. Whatever the issue is, think about speaking to an expert debt adviser for free with StepChange or National Debtline.
If you’re certain that money is only tight temporarily and you’ve weighed up the risks, compare personal loans to find the cheapest one for you.
You’ll need to consider how much you require to pay off your existing debt. It may be tempting to take out more than you need, but it’s important to be strict with yourself.
Debt can easily spiral and defaulting on your payments can have very serious consequences.
Next, think about the loan term. You want to be able to comfortably afford the repayments with your salary and pay off the debt as quickly as possible. The longer the term, the more you’ll pay overall, so don’t be tempted by the cheaper monthly repayments if you can pay more.
It’s possible to get secured and unsecured loans, which both come with pros and cons.
A secured loan is when the lender uses an asset, usually your home, as security in case you don’t repay your loan. Although interest rates tend to be better and terms can be longer, it can be a dangerous option because if you fail to pay off your debt, you could lose your home.
An unsecured loan doesn’t require you to use your home as collateral, but you may struggle to be accepted for one if you have bad credit, especially if you require a large amount. Failure to make repayments can result in legal action being taken against you and your debt being passed on to a collection agency.
Debt consolidation loans may be useful because:
Watch out for:
The total cost of your loan will depend on a number of factors including the interest rate, any fees or charges and the loan term.
Use our loan calculator to find out how much you can expect to pay overall.
Make sure you only pay off existing debt with a higher interest rate than the debt consolidation loan’s interest rate. Debt subject to a lower interest rate should be left where it is to avoid paying more than you need to.
Yes, it’s possible to take out a loan with bad credit but your options will be limited, and you may need to find a specialist lender or think about a secured or guarantor loan. Both of which come with their own set of risks.
Before taking out a loan, think about:
Savings – Create a budget to analyse your monthly incomings and outgoings. It may be a case of being really strict with yourself and ditching things like takeaways, holidays or non-urgent shopping (or cutting back on it), until you’ve saved up enough to clear your debt. It’s not a quick fix, but it’s the most sensible and safest option.
Remortgaging – If you own enough equity in your property, remortgaging could free up some cash to pay off your debts by extending your mortgage term. This is essentially a type of secured loan, so you risk having your home repossessed if you default on your repayments.
0% balance transfer card – If you’re able to be accepted for one, seriously consider it. You can transfer existing store and credit card debt to it and pay 0% interest for a set period. It could even be as long as 34 months.
Pay off as much as you can comfortably afford each month to make the most of the card.
Just ensure that you at least make your minimum monthly repayments to keep your 0% introductory period and pay off the debt before it ends.
You’ll usually be charged a fee which is a percentage of the amount you’re transferring.
Money transfer credit card – You may be able to use one of these to deposit cash into your current account. You can then use the money to pay off your existing debt, whether it’s from a loan or an overdraft (it’s best sticking with a balance transfer credit card for credit or store card debt).
There’s often a 0% interest introductory period, which could be up to 12 months. Although it can be revoked if you fail to make at least your minimum monthly payments.
The fee you’re charged will typically be a percentage of the amount you’re transferring to your account.
As with all credit cards, it’s important to read the terms and conditions carefully to see what you’ll be charged for and try to avoid making any new purchases on these cards.
If you’re struggling to control your debt and think that a loan is the only option, it’s important to take a step back and speak to a debt adviser.
It may be that a debt consolidation is the cheapest option for paying off your existing debt, but you have to be extremely disciplined to avoid falling even further into debt, especially if you choose a secured option.
Always make sure that you compare loans to find the best rate available for you and use our smart search to check which ones you’re more likely to be accepted for, without impacting your credit score.
And whatever you do, avoid payday loans.
Unsecured loans tend to require a good credit score, especially if you want access to the best rates.
It may be possible to be accepted for a secured or guarantor loan with a lower credit score, but it will depend on the lender.
Applying for a loan will impact your credit score, but it should build back up as you make your repayments on time and finally pay off the debt.
Your score may take a hit initially because although you’re taking out a loan to pay off existing debt, your credit score will just see it as another line of credit. This should be fixed once you pay off your existing debt though and your credit score will steadily improve.
Of course, if you’re rejected for a loan, or have multiple rejections, it will negatively impact your score.
They can be if they’re not used correctly.
It’s just another form of debt, which means those that were struggling to repay their debt before taking it out, will still probably be struggling. They won’t solve the problem and could even cause more debt if you can’t keep on top of the payments.
Yes, that is essentially what a debt consolidation loan is.
Although if any of your existing debt has a lower rate of interest than the debt consolidation loan, you should keep it where it is, or you’ll end up paying more.