What is debt consolidation?
Debt consolidation is a loan which in essence is used to pay off all other debts so you are left with one loan and one payment each month.
This usually lowers your monthly payments and makes managing existing debt much easier.
For example if you have 5 loans which are £200/month each, totalling £1000/Month, taking a debt consolidation loan could reduce this to £800/Month, making it easier and simpler to pay the overall debt back.
It also means you have one interest rate, one payment a month rather than several and one lender to deal with.
Who would be suitable for a debt consolidation loan?
Really anyone with 2 or more loans who wants to make monthly payments more manageable and simpler.
A debt consolidation loan is also suitable for someone with one loan that wants to pay this off with another loan as the rates or terms are more favourable.
Will using a consolidating loan save me money?
This will need to be calculated, check what rates are being offered and over what term, then check what it would cost to carry on paying your current loans/debt.
More than likely a loan used to consolidate your debt will be a much better option than having multiple payments go out.
Also you need to see if you can actual get a loan that is big enough to over the existing debt you have.
You can check if you’re eligible for a debt consolidation loan by clicking here.
Different types of consolidation loans
There are two types of debt consolidation loans available.
Unsecured loans are loans which are classed as personal loans, which are being applied for and used for debt consolidation.
As the name says, they are unsecured and not secured against any of your assets, home, car etc.
This is one of the most common types of loans and the application process is fairly simple.
You can compare all unsecured loans by clicking here.
Secured loans are loans that can only been taken out if you are willing to secure the amount against an asset. This is usually your home.
As the loan is secured, the amount the lender will offer is usually much higher.
Lenders will also take into consideration bad credit as the loan is secured and longer terms due to the size of the loan.
Benefits of a debt consolidation loan
- Less payments to make each month, as you will be using the loan to pay off all existing loans, you’ll be left will one payment a month to make.
- Lower monthly payment (possibly),
- More manageable and easier to keep track of. Rather than juggling 3-4 or even more payments each month, you’ll have ideally just the one payment after using the loan to pay off existing loans.
Things to consider for debt consolidation loans
If you are looking for a debt consolidation loan for more than £25,000, lenders will usually want to secure this against an asset, this is usually your home or property.
As the loan is secured against your property, think carefully before doing this as if you were to default on your payments your home is at risk.
If however you decide and are accepted for an unsecured loan, this is not secured against any assets, but you still need to make the payments on time each month otherwise your credit score will be affected and additional costs/fees could be added to the loan.
Make sure when applying for a debt consolidation loan you are able to afford the repayments each month. Also take into consideration any possible changes in the future like your job.
When you have taken out a debt consolidation loan, the amount of payments you make each month will drop. However don’t take this as a sign that you are paying less so you can apply for more loans or credit. Have a look at the numbers and the amount you are paying.
Finally, everything comes down to the specific loan deal that you receive from your lender. This can vary massively depending on your credit history, circumstances, how much you wish to borrow and the terms of your lender.
Is debt consolidation the right option for you?
Make sure when you choose a debt consolidation loan that you review all the various options that are available, be it secured or unsecured.
Check the lenders, the terms and the rates being offered.
Also check any fees that may be being charged. MoneyGiant don’t charge any fees but some of the lenders we work with may do, this is normally for secured lenders.