A simples guide

Debt consolidation loans explained

If you have lots of debts all over the place, you may want to think about debt consolidation loans. Turning multiple debt payments into one payment can simplify your outgoings. In some cases, you may even reduce your total debt with a lower interest rate. Consolidating debt is not always available if you have a poor credit score. Even if that is not the case, this method of repayment is not for everybody. This article should help clarify the process, its advantages, and its disadvantages.



What are debt consolidation loans?

Debt consolidation is the process of borrowing money to pay off what you owe to your existing lenders so you are only left with one debt and one outgoing payment. These loans can be useful if you are struggling with repayments or want to streamline your outgoings. Debt consolidation loans come in two forms. Secured and unsecured.

Unsecured debt consolidation loans

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. You can also expect to pay a higher rate of interest.

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Secured debt consolidation loans

Secured consolidation loans will generally be secured against your home. They are also known as homeowner loans. Of course, you will need to be a homeowner for this type of product. If you fail to meet your repayment schedule, you could lose your home. Using your property as security increases your likelihood of acceptance.

The benefits of debt consolidation

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

- Reduce your number of debtors. Borrowing for debt consolidation means repays all existing debts. You then pay a single lender each month

- Potentially lowering your monthly repayments by spreading the debt over a longer period

- Reduce the interest you pay. This is especially true if some of your existing debts are under high-interest agreements

- Improve your credit rating by making successful repayments

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

The dangers of consolidating your debt

You must consider the worst case scenario with any financial decision. The possible dangers of debt consolidation can 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 moving

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


How to get a debt consolidation loan

There are 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.

Does debt consolidation affect your credit score?

Like all other forms of borrowing, failure to repay will hinder 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 to find debt consolidation loans

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

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