What is a debt consolidation loan?
Debt can be scary, especially if it’s built up in a number of places.
Some people may choose to take out a loan to pay off the debts, and then you only have a single balance to pay back. This is called a debt consolidation loan.
Different types of debt consolidation loan
There are two main kinds of loan, and the type you need depends on how much you need to borrow.
The simpler kind is a personal loan, and these are usually available for borrowing between £1,000 and £25,000 – although you could find higher amounts if your credit history’s good. You might be expected to pay the amount back over one to seven years.
That should be enough to cover most people’s debts. But you might find lower Annual Percentage Rates (APRs) or longer repayment terms if you look at a secured homeowner loan. With these, you can borrow a lump sum of money against your property.
Don’t forget that with a homeowner loan, though, you run the risk of having your home repossessed if you don’t make the repayments. An unsecured debt consolidation loan is generally a safer option, but could cost you more.
And even with a personal loan, it’s really important to make your regular monthly repayments.
Choosing a debt consolidation loan
Our loan comparison page lets you look at loans up to £100,000, and you can compare both personal and homeowner loans on the same page. For homeowner loans, lenders might want you to have built up equity in your home to use as security.
You can either search on how much you want borrow, or the amount you can afford to pay back each month. Add in the length of time you’d pay it back over and you’ll see a table listing all the options.
The loans are listed in order of APR which is the total amount that the loan will cost you including interest and charges.
It’s worth looking at the total amount payable. This shows you how much you’ll actually pay back over the term of the loan. Paying off a £30,000 loan over 15 years, for example, might cost you more than £40,000 in the end. But if you paid the same amount back over 5 years you might only pay £33,500.
So it’s important to try and find a balance between affordable payments and a short loan period, so that you don’t waste money.
A really important thing about a debt consolidation loan is that you need to make sure it’s cheaper for you than situation you’re in already. If you have debts on credit cards, it might be better for you to move them to a zero rate credit card. That way you won’t pay any interest at all on the balance though you will pay an initial set-up fee. If you have a big overdraft, check that the APR on the loan is less than the interest and charges you’re paying on the overdraft.
Sounds simple, but it’s important that you don’t accidentally make your situation worse!
Bad credit debt consolidation loan
Got a poor credit history? It can be tough to find a debt consolidation loan for bad credit.
But there’s good news. Poor credit history doesn’t necessarily mean you can’t get a loan. On our loan quote page we list a number of providers who say they’ll consider applicants with poor credit.
Things to look out for
There are three important things to be aware of before you commit yourself to any loan.
First, if you miss payments on the loan, the lender can take you to court and, if it’s a secured loan, could even demand that your house is repossessed.
Second, loans often have a variable interest rate, so monthly payments could go up (or down). If you've also got a variable rate mortgage, you could get hit twice if rates go up, so make sure you can still afford your monthly repayments if they were to go up a few per cent.
And third, some lenders can actually make it difficult to pay loans back. Some impose a penalty if you try and repay early. On the flip side, some won’t allow a ‘repayment holiday’ which is where you can request a break for a month or two if things are tight. This could put you in real difficulty if you end up between jobs or your car or boiler suddenly needs replacing.
It’s great that you’re looking to deal with your debt situation. Let us help you find the right loan to get you back to black.
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