debt consolidation loans

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If you have several debts, you might want to think about getting a debt consolidation loan. Turning multiple debt payments into one payment can simplify your outgoings. In addition, in some cases, you might reduce your total debt by finding a lower interest rate.

Frequently Thought Questions

Taking out a loan is never something to be taken lightly, and a debt consolidation loan is no different. It’s important to make absolutely sure that you have all the information you need to make an informed choice. To help you do that we have put together these ‘frequently thought questions’.

What are debt consolidation loans?

Debt consolidation is the process of borrowing money to pay off what you owe to your existing lenders. This leaves you with just one debt and one outgoing payment which might make it easier to manage your outgoings. These loans could be useful if you are struggling with repayments or want to streamline your outgoings. Debt consolidation loans come in two forms. Secured and unsecured.

What is an unsecured debt consolidation loan?

The term unsecured is quite literal. When you take out an unsecured debt consolidation loan, your assets are not at risk if you fail to make repayments. This carries a higher risk for the lender. As such, you will need a good credit rating and you might expect to pay a higher rate of interest.

What is a secured debt consolidation loan?

A secured consolidation loan will typically be secured against your home. They are also sometimes known as homeowner loans. The important implication of using your home as collateral is that if you fail to meet your repayment schedule, you could lose your home. The upside is that using your property as security typically increases your likelihood of acceptance and you might get a more attractive rate of interest.

Can anyone get a debt consolidation loan?

If you want a loan secured against a property, obviously you’ll need to be a homeowner. Be aware too that consolidating debt is not always available if you have a poor credit score.

Why get a debt consolidation loan?

Debt consolidation loans have a few benefits. If you can keep up with the repayments, you could:

  • Reduce your number of debtors. Borrowing for debt consolidation means repaying your existing debts and consolidating these into one debt with one lender who you pay each month
  • Potentially lower your monthly repayments by spreading the debt over a longer period
  • Potentially reduce the interest you pay. This is especially true if some of your existing debts, such as those after Christmas, are under high-interest agreements
  • Improve your credit rating by making successful repayments

What are the potential dangers of consolidating my debt?

The benefits of debt consolidation loans are only applicable if you make your full monthly repayments on time. Before you agree to a consolidation loan, make sure it is the right option for you. Otherwise, you may end up in a worse situation than before.

You must consider the worst-case scenario with any financial decision. The possible dangers of debt consolidation could prove disastrous. For many, a debt consolidation loan should be the last course of action. You should look elsewhere if:

  • The loan amount would not cover all your existing debts
  • If your current debts are close to settlement
  • The fees for taking out the loan are so high that they outweigh the benefit of taking out a new loan
  • The fees for paying off your existing loans early are also so high they outweigh the benefits of taking out a new loan

In the end, the final decision is yours. You must weigh up the benefits against the risks.

How do I get a debt consolidation loan?

There are generally two criteria that lenders will look at before offering a loan for debt consolidation. Your outstanding debt and your credit risk. These will determine whether you may consolidate. Lenders may only offer secured debt consolidation loans for bad credit.

Plenty of personal loans can be used for debt consolidation. The decision to lend hinges on a combination of factors. The amount you want to borrow, the length of the loan and your income will all be taken into consideration.

Will debt consolidation affect my credit score?

Like all other forms of borrowing, failure to repay will affect your credit rating. If you do make successful repayments however, your score will typically improve over time. If you have several large debts, then consolidating could result in a lower interest rate overall making it easier to repay and also helping your credit score.

How do I compare debt consolidation loans?

You can find a range of consolidation loans on our website. Find and compare your options with our comparison service to find the right loan for you.

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