Debt Consolidation Guide

Debt Consolidation

Debt Consolidation Loans

If you’re struggling to repay your existing debts, debt consolidation (or consolidation loans) could be a viable option for you. To learn more about debt consolidation, carry on reading our guide.

What is Debt Consolidation?

If you’re struggling to keep up with individual credit commitments and repayments, a debt consolidation loan is a refinancing method which would enable you to merge all your debts together into one loan, or even take out another loan to pay off the existing one.

Many may choose this option due to having multiple loans from various different lenders, all of which will have varying repayment terms. The aim of doing this is to make the payments more manageable and help you keep on top of what you owe.

As with all debt solutions there are both pros and cons of debt consolidation loans and you must get debt advice before you consider debt consolidation as an option for you.

Types of Debt Consolidation Loan

When considering consolidating your debts, there are two main types of debt consolidation loan which may be available to you, known as secured and unsecured loans:

  • Secured Loans are ways of consolidating your debts into one loan and then securing it against an asset, such as your property. However, if you miss repayments, you could lose your property as a result. These can also sometimes be called homeowner loans if secured against your property.
  • Unsecured Loans are loans which allow you to consolidate your debts into one loan without having to secure it against any properties or assets.

Secured loans may be offered to you if you owe lots of money, or if you have a poor credit history. To get an unsecured loan, you will need a good credit score in order to qualify.

Advantages of Consolidating Your Debt

Streamline Finances

The ability to streamline your finances through merging your debts into one loan is one of the primary benefits associated with debt consolidation. Because you will then only have to focus on a single repayment plan, instead of several, the likelihood of missing repayments is reduced.

Potentially Reduce Interest Rates

Similarly, only having one repayment plan could mean that you end up reducing the amount of interest you’re paying on your loans, in comparison to multiple loans. By introducing a debt consolidation loan, you could even cut through loans with higher interest rates, such as payday loans for example.

Better Your Credit Score

While this may not sound like the case, debt consolidation loans (if kept up with successfully) could have a positive impact on your credit score in the long term. Though it is important to note taking out a debt consolidation loan could damage your credit score in the short term, it can be a great way to pay off your outstanding debts and even boost your score.

Disadvantages of Consolidating Your Debt

Debt consolidation is not the route everyone should take, as with any debt solution. It’s important to weigh up the drawbacks, as well as the positives of this type of debt solution.

Long Term Payments

Typically, a debt consolidation loan is a longer term solution and you will be required to pay off your loan for an extended period of time. This is something to be extremely mindful of when thinking about the future, especially if you go with a secured loan.

Additional Costs

There’s a likelihood that you may have to put upfront fees to take out a new consolidation loan, and many credit card companies will charge you balance transfer fees or closing costs.

External Factors

If there are external factors which are affecting your ability to repay your existing loans, for example the cost of living crisis or your mental health, then there is no guarantee that you will be able to meet the terms of your new debt consolidation loan. If this is the case, then a debt consolidation loan may not be the best option for you.

Should I Consider a Debt Consolidation Loan?

There are certain circumstances where a debt consolidation is a viable option and makes sense for you to venture down that route. For example, consolidating your debts may help when:

  • You can afford to keep up with your payments until the loan has been paid off
  • Your savings are not used up by the fees and charges
  • Your consolidation loan does not drastically extend your repayment period or have increased interest rates
  • You have a large amount of debt which you cannot currently pay off in your current situation

It is vital that you consider all aspects of debt consolidation loans, both short term and long term to determine whether this is the right path for you. Speaking to an expert debt advisor will allow you to discuss your options with a professional, and narrow down if debt consolidation will benefit you.

When You Should Not Consider Debt Consolidation Loans

As we’ve mentioned, debt consolidation is not ideal for every scenario. A consolidation loan may not work out well for you if:

  • You can’t afford the new, streamlined repayments
  • You actually end up paying more money overall, whether this be higher monthly repayments than your individual payments combined or for an increased time period
  • You really need help sorting out your debts rather than a new loan. If this is the case, a debt advisor may recommend a solution which enables them to negotiate with creditors and opt for a repayment plan instead.

Can I Get a Consolidation Loan with a Poor Credit Score?

When you have a poor credit score, there is an increased chance that you will be offered a consolidation loan with higher interest rates. This could be due to previously missed payments, default notices, CCJs, insolvency amongst several other factors.

So, while you may be offered a high interest rate on this loan, it is possible that this is not the best option for you.

How Can I Consolidate Debt?

Debt consolidation varies from person to person, so the best way to see how it would work out for you is to use our no-obligation online debt advice tool, which is available day and night.

You can input all your information into our online tool, where we will ask you about your existing debts, your income and outgoings, benefits and more. Using this information, our team of experts can suggest the best debt solution to consolidate your debts.

Get started on your debt journey with us through our tool, or get in touch with our team if you would like to speak to an advisor about debt consolidation.