Debt consolidation loans are loans to pay off multiple other loans – we see these advertised everywhere with familiar faces on TV ads telling us how you can consolidate all our monthly debts into one easy monthly repayment and the memorable catchphrases that accompany the ads. Whilst it may provide an ideal solution in some cases it’s certainly not right for everyone.
If you find yourself in a difficult situation with your money and juggling payments to more than one lender then don’t assume you are the only one. Britain as a nation, owes more than £1 trillion – yep, you heard me right – more than £1 trillion and that’s a lot of noughts! The idea behind a debt consolidation loan is that rather than trying to pay off the minimum amount for each debt each month, a debt consolidation loan could pay off each individual debt and leave you with just one single payment to worry about each month. Sounds great in theory but is it right for you?
A debt consolidation loan will pay off your existing debts and transfer the amount owed into one single loan with one manageable monthly repayment. You will still have to pay back all the money you owe but with a debt consolidation loan you may be able to reduce your monthly outgoings, pay a lower rate of interest, or be able to spread the costs out over a longer time period. This very often means that although you are managing your monthly cash flow better you will end up paying more (in some cases substantially more) overall because the debt is being paid off over a longer period of time so ……. do the sums and look at all the options first.
If you are careful about managing your spending, a debt consolidation loan can help by:
• Removing the stress and worry. We all know the pressures that debt can bring – a debt consolidation loan has the potential to remove those pressures.
• Reducing your monthly payments. By spreading out the term of the debt over a longer period you will often be able to reduce your monthly repayments to a current manageable level. Most people are often paying the minimum payment allowed on the existing debts. This may mean just paying off interest each month and not reducing the amount of the debt.
• 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. It is also a good idea to check your credit report before you apply for a debt consolidation loan – see credit score mending and the credit check for more information.
• 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 loan. Make sure you stop spending on your cards though.
Whilst unsecured debt consolidation loans are available it is more likely that such a loan will be secured against your property – read our sections on secured loans and unsecured loans and don’t forget that you home is at risk if you can’t keep up repayments.
• The Consumer Credit Counselling Service believes that consolidating debt is a sensible solution for just 3% of people in serious debt.
• Research has found that well over half of people who consolidate go on to rack up more debts using their cleared credit cards.
• If you do consolidate then make sure you close all those credit cards, store cards etc that you’ve just paid off ….. don’t get tempted!!!!
Where can I get a Debt Consolidation Loan
Before you decide on a consolidation loan, find out what’s on offer and what alternatives you’ve got. These could include:
• trying to make new arrangements with your existing lenders.
• checking that you’re making the best use of credit options you’ve already got – such as an overdraft facility, credit or store cards, a personal loan or extension to your mortgage.
• borrowing from relatives.
You could also take advantage of the free advice that’s available from debt counselling services, see also our section on how to deal with debt and, we strongly suggest, before deciding on a debt consolidation loan take advice from the experts.
If you do decide to take out a consolidation loan, shop around for the best terms from a reputable lender.
High street banks and building societies. Most offer a debt consolidation loan. A great place to start if you like to go for familiar brands and high street names you can trust (although perhaps the recent events have resulted in slightly less trust). Or you might want to be able to drop in and chat through your options face to face with the lender, as they usually have branches in every town. But a bank on the high street will often charge a little more interest than an online bank due to increased overheads.
Most offer a debt consolidation loan. A great place to start if you like to go for familiar brands and high street names you can trust (although perhaps the recent events have resulted in slightly less trust). Or you might want to be able to drop in and chat through your options face to face with the lender, as they usually have branches in every town. But a bank on the high street will often charge a little more interest than an online bank due to increased overheads.
Supermarkets, shops and post offices. UK supermarkets, shops and post offices are increasingly starting to offer their own financial products. Put a debt consolidation loan on your shopping list but make sure you shop around !
Online banks. With online banking you benefit from the fact that the lenders have lower overheads, so they usually charge less for debt consolidation loans. In fact, most of the lowest loan rates around are from online banks. As well as banking online, you’ll also be able to phone the loan company if you have problems or need advice. Another advantage is that you do not have to be in the UK to manage your loan which can be done 24 hours a day 7 days a week.
Online or High Street Brokers. Enables you to let someone else do the work for you and shop around to find you the best deal and, as they make a living by providing finance, they will be incentivised and will want to get the loan approved just as much as you will (especially in current times) so often a good place to start.
We can’t stress enough – if you are considering a debt consolidation loan it’s vital that you talk to an expert as there MAY be an alternative option that’s more suitable to your situation.
Remember also – your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it.