Do you have a few different loans you’re paying out currently? Wouldn’t it be great to merge these separate payments into one comfortable lump sum? If you said yes, you might want to consolidate existing debt into a single loan. Especially if you find it hard to keep up with repayments, or your repayment dates are all different, a debt consolidation loan could be a helpful solution for you.
What is a debt consolidation loan?
A debt consolidation loan is a loan you can take to cover all your existing debts. Instead of having to pay back each debt separately, you just make monthly repayments for one.
If you are looking to merge several loans, there are lots of debt consolidation loans available through banks, credit unions, building societies, and financial companies.
You’ll need to consider if this option works for you, and make sure you can afford the repayments as the interest rates could be different from what you are currently paying. You can end up spending a lot less in interest by doing this, if done correctly.
What options do I have to consolidate existing debt?
Just like with other types of loans, there are two kinds of debt consolidation loans – secured and unsecured. These are summarised below, but if you need more information, have a look here.
Secured loan: A secured loan is backed by your home or some other form of collateral. You’ll be able to borrow more this way, as your home is guaranteeing the loan. But be wary, because if you miss payments, you risk losing your collateral.
Unsecured loan: An unsecured loan is not backed by collateral, which means it’s harder to get one if you have a poor credit history.
If you aren’t sure which of the two options is best for you, you should seek financial advice. Remember, only seek advice from firms or individuals who are registered with the Financial Conduct Authority (FCA).
Advantages of debt consolidation loans
Consolidating your existing debt has several advantages, which could have a seriously positive impact on your finances. For instance:
- It can simplify your financial life. All your debts are compiled into one, making payments much easier to manage, plus you’ll only have to think about one interest rate. If you’re a busy person, with a lot on your plate, this means fewer things to keep track of.
- It can save you money. If you’re paying high interest rates on multiple credit cards, debt consolidation loans can have a much lower rate of interest. This means that you can free up money to cover your expenses and have better control over your finances.
- It can help you boost your creditworthiness. A consolidation loan works by paying off your existing debts – the consolidation loan appears as a new credit account, but the other accounts are repaid in full. This can have a positive impact on how lenders see you. Also, with one payment to manage, it’s easier to make all your payments on time. Making consistent on-time payments will also positively affect your creditworthiness.
But be aware – one potential disadvantage is that you could end up paying more in interest. This depends on the length of the loan and the initial interest rates offered. If the interest rates are higher, you may want to consider another option (such as a balance transfer card with a 0% introductory rate).
Is debt consolidation right for me?
Now that you know the facts, you may still be wondering if debt consolidation is a good idea. Of course, the answer will always depend on you.
This is why it is fundamental to understand your own financial position, so you can make informed choices about how to move forward. Debt consolidation loans can be incredibly helpful, but, like all debt, they have to be handled responsibly.
If you have high interest credit card debt on multiple cards, getting a low-interest debt consolidation loan can save you money. This may give you some much-needed breathing room to pay off your debts and take back control of your finances.
But, if you do choose to consolidate your existing debt, you still need to pay close attention to your finances. Some people will get a consolidation loan, and then rack up even more credit card debt on their existing cards. In this case, they end up in a worse position than where they started. Don’t be that person!
How can I get a debt consolidation loan?
Are you looking to consolidate existing debt but aren’t sure what loan offers may be available to you? Check by signing up for a Credibble account. It costs less than £10 a month.
We’ll show you tailored offers that suit your financial situation, without having an adverse effect on your credit report.
Before you apply for a debt consolidation loan, you may also want to check your Credibble Score. Lenders will look at many aspects of your finances to decide if they’ll lend to you. We’ve created Lender Score so that you can see all these important factors. With personalised pointers in your Score Booster, Lender Score lets you improve your chances of being accepted.
Credibble offers two fabulous solutions
If you’re preparing to take a mortgage, never apply until you’ve tried our unique and FREE Credibble Home app. Our smart technology will tell you what you need to fix so you avoid rejection. The app predicts when you will be able to buy, for how much and tracks your month-by-month progress to mortgage success. We’ve even added your own mortgage broker, so you get the best deals available.
More focused on your credit rating? Well, get started for free with Credibble’s 24- Factor Credit Check to truly help you improve your creditworthiness and how lenders view you. (Remember: lenders don’t use your credit score! We’ll show you what lenders look for and how to get your credit report in the best shape possible).
Last updated by Robert Edwards, May 2022