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Debt Consolidation Explained What is a Debt Consolidation Loan?
If you're reading this, then there's probably a good chance that you're looking into solutions to help manage your debt. If you have multiple loans that you can't seem to be able to keep track of and your financial situation is turning dire, then you may need some help managing everything; and a debt consolidation loan could be the solution.
What is Debt Consolidation?
Let's start with defining the basic concept - Debt consolidation is when you downsize your debt. You take debt from multiple sources and merge it into just one easy to manage primary source.
If you're making multiple payments to different lenders each month, it's likely that you've lost track of how much interest you're paying and to whom. Before applying for a debt consolidation loan, make sure that you calculate interest on current loans. This can help you to see whether you'll end up saving money or paying more by taking on additional debts.
What is a Debt Consolidation Loan?
A debt consolidation loan is a loan that allows you to consolidate your debt. In simple terms, it is a new loan that you take out, that will encompass all of your debt, from multiple different sources. You get this loan for a more substantial amount, which allows you to pay off your past debt, and continue to pay off this loan in instalments, just like you would any other credit.
Alternatively, you can ask for debt advice if you feel that your situation warrants it. Free debt advice is available from many different organisations. This is the last step you should take before considering taking serious action. Moreover, did you know that the government can help you write off as much as 85% of your debt? National Debt Line can help by offering you the help and advice that you need.
Could I be eligible? Who can get a Debt Consolidation Loan?
If you're looking into debt consolidation loans, but you're worried that you might not be able to get yourself one, then this next section is for you; here you will find all the information you need to know regarding whether you are able to qualify.
Who Can Get One?
There are no categories of individuals that are specifically excluded from this kind of lending, so there is no reason why you shouldn't be able to get a loan, as long as you are able to meet the minimum criteria. Most financing solutions will require you to meet some necessary requirements, and this is no different. You first need to check off some straightforward, fundamental criteria, which will include being a resident of the UK and being at least 18 years or older. Moreover, some financial institutions may ask that you open an account with them for a minimum time such as a period of 30 days.
One of the best ways to determine whether your loan application is likely to be accepted is by checking your credit score. If you find that your credit score is too low, it's best to take some time to build your credit score before making a loan application. You can use websites such as Experian, Equifax, CallCredit which are free to use to check your credit score. As well as reviewing your current financial standing, it will also allow you to rectify any inconsistencies.
You will undergo some of the traditional checks that come with loans - a credit check, an affordability check, an employment check, etc. Mostly, what the lender is setting out to find out is that you are not lying about your identity, that you can afford to repay the loan, and that you do not have a record of poor financial behaviours, such as defaulting on loans and CCJs.
If you struggle with a poor credit rating, you may want to consider secured loans as a means of consolidating debt.
Who Are Debt Consolidation Loans Good for?
Now you've read and understood some of the basics about debt consolidation; you still may be wondering whether it’s the right option for you. In this following section, you will find everything you need to know about who debt consolidation loans are suitable for and all the available information to see whether you could be a suitable candidate for a debt consolidation loan. Show More »
Where are Debt Consolidation Loans Helpful?
When your debt is in multiple places, each one of your loans is going to come with its own set of specific details, such as:
- Amount borrowed
- Amount repaid
- Interest rate
- Repayment term
- Instalment date, etc.
We understand that it's hard enough to remember everything about just one loan, let alone several! A debt consolidation loan will help you to avoid this headache altogether and cut down on things like interest rates and repayment terms. In addition to this, you will be able to eliminate your anxieties and ensure that you are in complete control of your debt so that you can manage it more effectively.
When Should You Get One?
Debt consolidation is quite a multifaceted finance option and can help in a number of different personal circumstances. Here are just a few cases of instances where a debt consolidation loan could come in handy should you find yourself in that situation.
You can't afford to repay all your loans
More debt means more money to repay, and after a while, you might find that it is starting to become increasingly difficult, if not impossible. Some instalments will have to be skipped in favour of others, which will undoubtedly attract an adverse credit rating, meaning you might have to deal with some very irate lenders. However, did you know that when you consolidate your debt, you can sometimes reduce the amount you owe, and the interest rate? Keep that in mind as it can help with your affordability.
You find it difficult to manage and keep track of payments
Do you remember if you repaid all of your loans last month? Moreover, how much did you pay for each? Do you know how much you have left to repay? What days do you make your repayment? What about how much interest you're spending on each of your loans? If a lender threatened you for not paying, would you even know if they're trying to scam you or not? If it becomes too confusing to keep track of all of your payment plans, then it's time to streamline and consolidate under just one loan. You have one payment to make, in one place, once a month.
You want to improve your credit score
Bad credit influences your borrowing experience in the worst kind of way. It can hinder you by limiting the amount you can borrow, your repayment term, and by increasing your interest rate, all to accommodate the risk you represent to the lender. However, you can help to improve your situation - and your credit score - all by consolidating your debt. Yes, that's right, getting a debt consolidation loan can help you be more diligent about repayments, reduce your debts, and even decrease that sky-high interest rate. « Show Less
Why you should choose debt consolidation Why is Debt Consolidation a good idea?
Why Should You Use Choose Debt Consolidation?
Considering a debt consolidation loan but still feel that you're on the fence about getting one? If you are in need of some persuasion that consolidation is a good decision to make then read more to find out why debt consolidation is a good idea and how it's helped borrowers in the past. Show More »
How Can Debt Consolidation Help?
It makes life easier
As we've been discussing so far, debt consolidation can make your life so much easier. The sheer amount of stress you get rid of makes it worth it. Think about all the time you can save if you're not running around paying loans every week, and how much easier it would be to keep track of all the details and the payments you have to make. Streamlining debt can significantly cut back on the time and effort necessary to manage your debt.
It reduces overall interest
We all know what can put a downer on things when it comes to loans - the dreaded interest rate. As you will be well aware, the lender has to make a profit by lending you money, and that's where interest comes in. However, depending on the loan, the interest rate can be massive, and it sometimes means that you pay twice the amount you borrowed in interest alone. A debt consolidation loan gives you the chance to reduce the overall interest you will be spending on the loan, which means you reduce the amount of debt you'll be paying back.
It prevents you from missing payments
If you're juggling multiple loans, it's very easy to get distracted and miss a payment, or just not be able to afford it. After all, these instalments aren't cheap, and when you have multiples, sometimes you have to make some difficult choices and prioritise. Debt consolidation makes it possible for you to stop missing payments (accidentally or on purpose) - if you've only got one loan to repay, it's much more difficult to overlook a payment that's due, and it's much easier to afford, as well! Especially if you end up getting your total amount reduced, you really can't go wrong. « Show Less
Optimise your Debt Consolidation Loan for the best results How to Make the most of your Debt Consolidation Loan
Debt consolidation can be a real-life saver for some borrowers. Depending on how dire your situation is and how badly you need to reassess your debt situation, it may very well be your best solution. Therefore it's important to make the most of your loan, read on to find out how to make the most of your debt consolidation loan.
Optimise Your Debt Consolidation Loan
In order to avoid any costly mishaps, you should opt for a debt consolidation loan with a low-interest rate and low monthly repayments. However, how can you find the best prices? Not to worry, we're here to help! The following section will take a closer look at how to get yourself the best rates and the best ways to use your debt consolidation loan to utilise its benefits. Read on to find out how to stay on top of your finances and get one step closer to your dream of a debt-free future.
Beware of the 'representative APR'. This is the advertised interest rate that you may get if you apply for the loan; however, you're not guaranteed to get this rate.
How to get the best rates for your debt consolidation loan
If you want to ensure that you get rid of your debt as quickly as possible, you'll need to scour the market to find the best rates. Finding the lowest rates possible will help you to save money on interest payments, and work towards reducing or eliminating your debt over time.
Work out how much you are paying in interest
Before searching for a new loan, don't forget to work out how much you are spending on interest currently. With this information, you can calculate how much money you could be saving by opting for a debt consolidation loan with a lower interest rate.
If you have multiple debts from different lenders, you'll need to work out how much interest you're paying to each lender and add the values up to determine how much you're spending in interest per month.
Make the most of comparison sites
It can be extremely time-consuming, draining and confusing visiting each individual lender’s website and manually comparing different offers. Comparison sites do all the hard work for you and allow you to see representative APRs side-by-side so that you can quickly find the best rate for you.
Check if it’s cheaper to borrow more
Generally, lenders tend to base their APRs on the amount that you want to acquire. In some cases, if you borrow more, you can obtain a lower APR than if you were to borrow a smaller amount of money. You'll need to carry out some calculations to find out whether borrowing more will actually save you money. However, you may find that you only need to borrow a small amount more to obtain a lower APR, so it's well worth researching to see if this works for you. « Show Less
How to get the most from your debt consolidation loan
When looking for any financial product, you'll want to make sure that you're getting good value for money. Making the wrong decision can see you paying over the odds on monthly repayments, which could potentially worsen your financial position in the long-run. Follow these tips for a better debt consolidation loan.
In order to protect your credit score, you will need to carry out a 'soft search', such as the Eligibility Calculator from Money Saving Expert. This allows you to determine whether your loan application is likely to be accepted before completing a full application. Making too many loan applications within a short period of time can harm your credit score, which can reduce the chances of any future credit applications being accepted.
Find a loan with a low-interest rate
If you're looking for a debt consolidation loan, it's likely that you have multiple high-interest debts that you want to get rid of. One of the first steps in using this method to get rid of debts quickly is finding a loan with the best rates. Don't worry; we'll show you to find the best debt consolidation rates later on in this guide. Once you've found yourself the best rate, you're ready for step two.
Use your new loan to pay off existing debts
Are your current rates poor? If so, once you've received your debt consolidation loan you can use this to pay off any high-interest debts. This includes financial products such as credit cards, payday loans or any other high-interest loans that you're currently paying off. If your loan is large enough, you may be able to pay off all of your other debts, so that you only have to account for one monthly repayment rather than juggling multiple debt repayments.
Ensure you keep up with your monthly repayments
It's important to remember that using a debt consolidation loan doesn't reduce the amount of money you owe. You'll have to keep up with your monthly repayments in order to improve your financial situation. If you've managed to obtain a debt consolidation loan with a reasonable rate, then you should be able to clear your debt more quickly if you stay on top of your payments and pay on time.
What you need to know The Pro's and Con's of Debt Consolidation
For many, Debt consolidation is necessary, however, alike to other types of loans, it is not without its own advantages and drawbacks. Before you make your decision about a debt consolidation loan, it's vital for you to know the negatives as well as the positive, so here are some pros and cons for you to consider.
Advantages and Disadvantages
If you can't seem to work your way out of debt, then debt consolidation loans may be the financing solution for you. Think of how amazing it would be not to have to keep track of all those loans and stay on top of each and every one. Moreover, with the amount of debt we're wrestling with in this country, any help is welcome. Step Change reports that the average person coming to them for help last year in 2017 had over £9,000 debt in personal loans alone.
Deciding to take out a loan is not one that should be taken lightly. Making late payments or failing to pay altogether can leave you with significant financial problems in the future.
What are the Pros?
If you're still not convinced that debt consolidation loans are a good solution for you or if you need more info to sway you, then perhaps you would like to take a look at the pros and cons of debt consolidation. First up, read up on all the advantages this type of lending can bring. Show More »
You can reduce your debt
The most attractive feature is, perhaps, the possibility of lowering your overall debt. Depending on how much debt you have and where you get your loan, you can cut back on your total amount, usually by decreasing your interest rate. You see, a lower interest rate means you end up paying a lower extra charge in addition to the amount you've borrowed, and who wouldn't appreciate that? Be sure to bring up the possibility at least when negotiating the new terms with the lender; the flexibility they offer you may surprise you! Keep in mind that if you opt for a debt consolidation solution from a bank you already have a relationship with, you may be able to take advantage of that and get a reduction. Most banks will be willing to offer you a discount when you refinance this way.
You can manage your debt easily
The other significant aspect is debt management, which is not at all easy to do, but which can be made simpler with the help of a debt consolidation loan. Think all the different things you need to do and remember now and imagine only needing to keep track of one single loan, instead of multiple. That will cut back on the time and effort you invest in managing your debt and will reduce the amount of stress generated by your finances.
Debt consolidation offers you the luxury of forgetting the stress of running around paying loans multiple times a month or having to jot down and remember all kinds of details about each one. Streamlining your debt will simplify your life in more ways than you realise, and it will also cut back on the time you spend managing it and worrying about it.
It can make it more affordable
Since the terms of your loan are entirely new, they can make this loan more affordable. That can be achieved not only through an interest rate reduction but also by setting smaller instalments. A too-high instalment can put significant stress on your purse, but also your life, in general. This way, you can pay less every month and make repaying the loan more affordable for you and your current circumstances. Don't be afraid to take advantage of this clean slate you benefit from with the new loan. « Show Less
What are The Cons?
Moreover, since we've looked at benefits, it's only fair also to take a look at some drawbacks. What are the risks you take when you commit to a debt consolidation loan? What are the negatives of this arrangement? Do you have anything to lose? Consider these aspects before making a final decision. Show More »
Your interest rate may increase
Just how your interest rate may decrease, it may also increase. How your new loan terms end up depends on your financial situation, how you've been dealing with your repayments, as well as what financial institution you choose. A higher interest rate typically means paying more than you would have before, unless you are willing to pay the loan off in fewer instalments (or early), in which case, the amount will be less impacted by the interest rate.
Consolidation is meant to be advantageous for the borrower and make it easier to repay their debt, but if your interest rate is higher and that impacts the overall amount you are set to pay by the end, then you may want to reconsider. Of course, you may choose to repay early, which would cut down on the amount you pay in interest, but as you will see, that comes with its own set of problems, as well.
Your debt may grow, or your loan may take longer to repay
Convenience, unfortunately, comes at a price, and that may be unaffordable for you. It's true that you can reduce your monthly instalments, but that can mean that your loan repayment term will extend for longer. Depending on how high your interest rate is, that can mean a higher total amount to repay. Alternatively, if you wish to repay in a shorter amount of time to dodge the interest charge, then your monthly repayment instalment will be higher, which, again, may be difficult for you to afford on a regular basis.
Now, it's true that you can opt for more affordable repayment instalments, but unless the total amount is significantly decreased, it can mean that your loan merely is extended and you have a longer repayment term. If your interest rate is not massive, this might still be a beneficial arrangement for you, if the convenience of affordable instalments offsets the increased overall repayment. If, however, this severely impacts the total sum and affects your financial situation in any capacity, then it may not be the best idea. Plus, you may find that you don't want to be tied to this loan forever.
Early repayment charges are possible
You should know that if you were planning on making an early repayment in order to avoid massive interest charges, you are out of luck - there is a charge incurred for early reimbursements. Of course, if the money you save is still significant, it's worth going through with this option, but it's something you need to be made aware of before you make plans counting on it. « Show Less
What are The Alternatives?
If you believe that perhaps a debt consolidation loan isn't for you, your circumstances or maybe you just want to keep your options open; then you might be wondering what the alternatives are? Here are just a few other options you can opt for instead of a debt consolidation loan. Show More »
Your best bet may be to get a secured loan. That's because you get a more considerable amount of money, and you don't need to worry as much about your credit rating or anything like that, as it is less critical. What is essential is the asset you put up as collateral, as its value will dictate how much money you can get. A secured loan for homeowners or even a logbook loan should be suitable, but of course, there are drawbacks to consider.
The biggest red flag is the fact that you risk losing the asset to the lender. No one wants to lose their car or their home in exchange for a loan, and especially if you’re previous debt was all from unsecured loans, consolidating them with a secured loan is a significant risk on your part. You would have to be reasonably sure that you would be able to repay the loan in order to have the confidence to put an asset up as collateral.
Logbook loans are also a secured form of finance which borrowers transfer the ownership of their vehicle (whether it be a van, car or a motorcycle) to a lender as security for borrowing generally a large sum of money. This particular form of credit is ideal for those who are looking to secure their loan but aren't property owners. It is essential to consider the risk when taking out a secured finance option, for advice go to the Money Advice Service.
The credit card saves the day, once again. It's so convenient, and if the amount you need is not massive, you might be able to get away with consolidating your debt with the help of your credit card. This will depend on how much wiggle room you have, regarding amounts, and exactly how much interest you pay on your credit card. Interest rates aren't known for being low, but if you manage to get your hands on one of those 0% cards and you are confident you can repay the money within that grace period, then your interest charge will be 0, and you will be sorted.
Peer to peer loans
If traditional financial institutions aren't giving you the time of day (or perhaps you don't trust them), then maybe borrowing from a fellow peer sounds more appealing to you. The advantage here is that the person sets your terms, and perhaps you might be able to negotiate something in your favour. The disadvantage is that the lender will consider your credit rating, so if that is not exactly perfect, you may find that you get rejected. An advantage, however, is that there are multiple lenders to choose from, and someone may be willing to lend you the money. « Show Less
One of the best things about debt consolidation loans is our loan terms are renegotiated. So, if you've been stuck with conditions that are not precisely advantageous at the moment, you're in luck. This is an opportunity for you to get a new interest rate, a new repayment term, and more importantly - a new loan instalment to pay. That means that you can set it up so that you pay less every month, thus making the loan more affordable. If you're currently struggling to make ends meet and cover several instalments a month, then this arrangement should be the perfect solution.
Frequently Asked Questions FAQS
Between payday loans and other forms of personal lending, it can become very difficult to manage loans and payments in so many different places. That is why debt consolidation is an excellent idea, but is a debt consolidation loan the best option? Review the information carefully and decide whether this type of loan is suitable or if you prefer a similar alternative.
What is APR?
In layman's terms, a representative rate is an overall snapshot of what lenders can expect to pay in interest. However, as different lenders will meet different levels of criteria, this can alter dramatically.
What information will I need when I apply?
In order to apply for a loan with Top Rated Personal Loan, you will need to have the following information to hand:
- Details of your income, along with any amounts you must pay in relation to rent or a mortgage.
- A home telephone number (must be a landline)
- Details of your residence over the last three years
- The name and address of your employer
Could I be eligible for a Debt Consolidatio Loan?
To ensure that you are eligible for a personal loan, applicants should meet the following criteria:
- You are over 21 years of age and in permanent employment.
- You can't be in receipt of any County Court Judgements or bankruptcy.
- You possess a bank or building society account in your name.
- That you are a UK resident and have been for the last three years
Can a personal loan work?
Debt consolidation loans are customarily secured against assets such as your house or car. This means that if you fail to keep up with your repayments, you'll lose the secured asset and the lender then has the right to sell your assets in order to cover the amount owed. If this sounds like a risky option, you may want to opt for a personal loan. Personal loans are unsecured; therefore, you eliminate the risk of losing your home or car if you can't keep up with repayments. However, it's important to note that personal loans typically have higher interest rates than secured loans, so you may end up paying more in the long run.
Is a Credit Card Better?
A loan is a significant and often long-term commitment, so it may not suit every individual situation. Credit cards can offer a more flexible solution for your finance shortfalls. With a loan, you have to make regular monthly payments until the debt is cleared. If you're a freelancer, seasonal worker or in part-time employment, you may have irregular income patterns that make it more difficult to make these monthly payments. Alternatively, with a credit card, there is much more flexibility when it comes to credit cards. You'll have to pay the minimum payment each month; however, you can pay off more money each month and clear your debt without having to worry about early repayment fees.
How Much Can I Get With A Debt Consolidation Loan?
Since this loan is meant for debt consolidation purposes, it's likely you're going to get it in a more considerable amount. The maximum amount you can get depends on what kind of loan you go for, as well as your financial situation. If you opt for an unsecured loan, for example, you can expect a maximum of around £20,000. This hinges on an excellent credit score, however, a guarantor, an excellent projected income, etc. Not everyone will be able to get the full amount. The other option you have is to get a secured loan. A secured loan is a loan where you need to put an asset up as collateral. This effectively secures the loan, should you become unable to pay and end up defaulting. In that case, the lender can legally keep your asset in order to offset the loss incurred by your failing to repay the money you borrowed from them. This option will give you more flexibility regarding amounts, but the sum you can borrow will depend on the value of your asset, to the tune of £35,000, or perhaps even £50,000. The asset representing collateral must be of higher value than the total amount you borrowed.
Can Anyone Get A Debt Consolidation Loan?
There are no categories of individuals that are specifically excluded from this kind of lending, so there is no reason why you shouldn't be able to get a loan, as long as you meet the criteria. Yes, any financing solution will require you to meet some necessary requirements, and this is no different. You first need to check off some straightforward, fundamental criteria, like living in the UK and being a legal adult. Certain financial institutions may ask that you open an account with them for a specific minimum time, like 30 days. You will undergo some of the traditional checks that come with loans - a credit check, an affordability check, an employment check, etc. Mostly, what the lender is setting out to find out is that you are not lying about your identity, that you can afford to repay the loan, and that you do not have a record of poor financial behaviour, such as defaulting on loans, etc.
Will Debt Consolidation Loans Hurt My Credit?
I'm sure you're worried about your credit score - we all are. So you're probably wondering how a loan like this will affect your rating. Will it hurt it? Well, as long as you keep repaying every instalment on time, the answer is no, there is no reason why a debt consolidation loan will hurt your credit. In fact, repaying it consistently should do wonders for your credit rating and help it improve, as you are demonstrating good faith and an ability to repay your debt responsibly.