A debt consolidation loan is a way of gathering several different debts into a single affordable payment. It can be a viable option for paying off credit cards, store cards, and personal loans.
Read on for detailed information on debt consolidation loans, including what a debt consolidation loan is, how you qualify for debt consolidation, and how consolidation loans impact your credit rating.
What is a debt consolidation loan?
The idea behind a debt consolidation loan is simple. It’s a new loan that allows you to pay off multiple debts and then pay only a single monthly repayment instead of managing several at a time.
Consolidating debts isn’t going to make them disappear, but it can be a way to manage your money and reduce your monthly outgoings.
With that in mind, it’s important that a consolidation loan is enough to repay all smaller loans and payments.
Are you struggling with debt?
We have a wide range of debt management solutions that could help you write off up to 81% of your debtsCheck if you qualify
What types of debt consolidation loans are available?
There are two main types of debt consolidation loans:
Secured: A secured debt consolidation loan is a loan where the amount borrowed is secured against an asset like your home. These are sometimes referred to as homeowner loans. You could be offered one if you owe a large amount of money or have poor credit history.
Unsecured: Where the debt isn’t secured against any other assets. You could consolidate up to £25,000 using an unsecured personal loan.
Consolidation loans often have a higher interest rate than those that are linked with your original debts. It’s important to be aware that if you have a history of defaulting on repayments you will face high interest charges on any consolidation loan.
A debt consolidation loan may be a good option for you if you have a steady income and a good credit score, but the likelihood of getting this will be unlikely if you’re struggling with unsecured debts.
Am I eligible for a debt consolidation loan?
To be granted a debt consolidation loan, you must meet the following conditions:
- Have a steady job and income in order to manage repayments.
- Have enough financial stability to be able to cope with repayments if your circumstances change – such as falling ill or if interest rates rise.
- Have a good credit rating to allow you to get the best rates.
- You haven’t consolidated a debt in the past.
It’s important to note that lenders will decide whether to grant a loan on a person-by-person basis.
Before choosing a consolidation loan, you should get advice from a debt expert, as there could be a more suitable way to clear your debt that you haven’t considered.
What are the advantages of a consolidation loan?
- Everything you owe is pulled into one place, meaning you only have one payment to manage and one interest rate to keep track of.
- You’ll only make one monthly payment rather than juggling several payments at a time.
- It’s an informal solution, so doesn’t have to be recorded on a public insolvency register.
- It could give you more time to repay your debts.
- The amount you pay towards your debt each month may be reduced.
- A debt consolidation loan will have a positive impact on your credit score – as long as you meet the monthly payments.
- Your debts will be repaid at the end of the consolidation loan term, assuming you haven’t missed any repayments or fallen further into debt.
What are the disadvantages of a consolidation loan?
- Your debts must be paid in full, there is no debt forgiveness.
- You may not be eligible for a consolidation loan if you have a poor credit score and loan companies feel you don’t have enough income to make repayments.
- Interest rates are not frozen.
- If you opt for a consolidation loan, you could pay back more than if you’d handled the debts individually as the loan is repaid over a longer period of time.
- If you don’t keep up with the loan payments, the loan provider can take action against you.
- Your home could be at risk if you choose a secured loan.
- It may take longer to repay your debts than with other debt solutions.
How do I apply for a debt consolidation loan?
Each consolidation loan will be slightly different, but these are the basic steps to using one to become debt-free:
Search for the best deal
Many companies offer consolidation loans, so there are different rates out there. Using a price comparison website could help you find the best option for your lifestyle – one with lower interest rates and over a term that’s right for you.
Apply to the lender
Once you’ve found a suitable loan, the next step is to apply for it. You may need to provide proof of your income in order to demonstrate your ability to meet the repayments. Your credit score will also be checked and taken into account.
Use the loan to settle your existing debts
If you are approved and receive the loan, the next step is to distribute it between your existing creditors in order to settle and close your accounts with them. This leaves you with only one creditor, who you will pay back, plus interest, in a single monthly instalment.
Repay the consolidation loan
The final step is simply to keep up with your monthly repayments. If you’re successful in doing so, you’ll eventually be able to clear your debts.
Do debt consolidation loans hurt your credit score?
While consolidation loans will have a positive impact on your credit rating in the long term so long as you keep up with payments, you may may experience a temporary lowing of your credit rating when you first sign up for one.
Like all debt solutions, debt consolidation loans are a signal to lenders that you have had an issue with debt repayment in the past. So long as you keep up with repayments, however, consolidation loans should help you arrest mounting debt and look forward to a brighter financial future.
Can I get a debt consolidation loan with poor credit?
Like any other loan, debt consolidation loans are issued at the discretion of the lender, who will consider your credit history and likelihood repaying what you borrow before approving your loan. That means the better your credit rating, the more likely you are to be approved.
If your credit score is poor, there are ways for you to increase your chances. If you own your own home, for example, it could be possible to take out a secured loan against your property. This should be carefully considered, however, as defaulting on payments may put your home at risk.
If you are looking into debt consolidation as a way of getting on top of your debts, you should always seek debt advice first. There are several debt solutions available to people with money troubles, many of which are specifically aimed at those with poor credit.
Is it a good idea to get a debt consolidation loan?
Whether a debt consolidation loan is the right idea for you depends on your financial circumstances. If you have a range of debts to different creditors and a steady income that would allow you to make regular monthly payments, you may be a good candidate for debt consolidation.
Before taking one on, you need to be sure how debt consolidation loans work. That’s where Creditfix can help. As the UK’s biggest debt solution provider, we help people deal with debt, and can ensure you have all the debt advice and information you need to make the right decision for you financial future.
If you’re looking for free debt advice, or need help deciding whether debt consolidation loans are the best way to pay down your debt, talk to one of our friendly debt advisers today. The phone number is 0800 0431 431, we’d love to hear from you.
Frequently asked questions.
Need more info? Here are a few of our most frequently asked questions on this topic. If you don’t see the answer you’re looking for here, give us a ring – we’d love to help.
It depends on your circumstances. Many consolidation loans will actually help to increase your score, but if you continue to use large amounts of credit after clearing your debts or miss payments to the loan, your score can be brought back down again.
If your credit score is already low, you’ll find it difficult to get a consolidation loan, and if you find a company willing to lend you the money you may find that they will charge you higher interest and penalties.
It’s best to shop around for the best deal and pick a loan that’s suitable for your situation. Companies will usually look at how much debt you owe overall, as well as your credit score to assess the level of risk in lending you money. It can be helpful to use comparison websites to do your research.
There are two types of debt consolidation loan: secured and unsecured. A secured loan is one that’s taken out against one of your assets, for example, your home, which can give you better rates, but put your home at risk.
Unsecured loans are much like other loans. None of your assets will be at risk but you’ll need a good credit rating to be able to get accepted for one.
Using a consolidation loan to clear your debts could save you money by allowing you to make just one payment to the loan instead of several payments to different companies. This can also mean that you end up paying less interest in the long run.