Debt consolidation involves taking out one loan to pay off multiple debts. This allows you to restructure your finances so that you only have to worry about one monthly repayment, rather than having to keep up with several smaller monthly repayments.
Debt consolidation loans are not without their risks, however, when used responsibly they can help you to get your finances back on track. In this article we'll go over the pros and cons of debt consolidation, how to use them in a responsible manner and give you all the information you need to determine whether debt consolidation could be the right financial solution for you.
The pros and cons of debt consolidation
It's crucial to be aware of the advantages and disadvantages well before taking on new debts as this can help you to avoid financial problems further down the line.
Why is debt consolidation a good idea? If you have a number of debt repayments to remember each month, a debt consolidation loan can help you to reduce these outgoings so that you only have to worry about one monthly debt repayment. This can make it easier for you budget, and it can also reduce the risk of missing payments.
As well as this, you can may also be able to save money by opting for a debt consolidation loan. If you borrow money at a low interest rate to pay off your high interest debts, you can save money on monthly interest payments and potentially repay your debts sooner than planned if you stick to your repayment schedule.
As well as the positives, these types of loans also come with their negative points. For example, you are not guaranteed to be accepted for a debt consolidation loan. Lenders will consider factors such as your credit score and the amount you want to borrow before deciding whether or not to lend to you. If you're seen as a 'risk' your loan application may be rejected.
It's also important to remember that debt consolidation does not reduce the amount of money that you owe. You will have paid off most of your debts, however, you'll still have to pay the same amount of money that you borrowed back to your new lender.
Lastly, these loans may not suit every situation. If you're a part-time or seasonal worker with an irregular income, you may not be able to make the regular monthly repayments. These types of loans are only suitable for those with a steady, regular income, as you are less likely to fall behind on payments and miss deadlines.
Is a loan flexible enough for you?
Deciding whether debt consolidation is the right option for you will largely depend on your personal situation.
It's crucial to remember that once you sign up for a loan and your application is accepted, you enter into an agreement with your lender stating that you will pay off the debt according to their payment plan. This means that you must pay the monthly repayments, and you can't pay any more or less than the amount outlined in the repayment plan. This is why some prefer to use credit cards as alternatives as they can be more flexible than debt consolidation loans.
If you feel that this is the right option for you, read on to learn how to get the best debt consolidation loan deal.
Making the most of your debt consolidation loan
Follow our top tips below to get the most out of your debt consolidation loan and find the best deal.
Check your credit score
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.
Making credit card payments on time, reducing current debts and cancelling unused store cards are just a few of the things that you can do that will, over time, improve your credit score.
Use comparison sites to check rates of current lending
Comparison sites should be your first port of call when looking for loans. These allow you to see interest rates and offers site by side, making it easier for you to select the right deal. Go Compare, Money Supermarket and Money.co.uk all have comparison tools that you can use to check the rates of current lending and find the best debt consolidation deal.
Top tip: 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.
Use soft search tools and eligibility checkers
In order to protect your credit score, you will need to carry out a 'soft search'. 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.
Calculate interest on current lending
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.
Making the decision 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. If you do choose to opt for a debt consolidation loan, employing the steps above can help you to find the best deal, make most of your money, and work towards a brighter financial future.