Debt Consolidation:
Debt consolidation is when you take out credit, such as a loan, to pay off your existing debts. This may include loans, credit cards and overdrafts. By consolidating your debts, you would only need to make one payment to one lender, rather than keeping track of multiple payments.
Depending on your situation, consolidating your debts could help you to lower the amount you pay in interest. It could also allow you to reduce your monthly payments, though this may mean you need to pay more in interest overall if you repay the new loan over a longer period.
While consolidating your debts can have some benefits, it’s also important to consider the risks to help you understand if it’s suitable for your individual situation.
Debt consolidation loans aren’t right for everyone. It’s important to check all the options available to be sure you’re making the right choice. While consolidating debt often sounds like a promising solution, it could make your situation worse. It may not be an option at all if you have a poor credit history.
Even though it is known as a ‘debt consolidation loan’, it is no different to any standard personal loan or secured loan and works in exactly the same way.
What debts can I pay off through debt consolidation?
Debt consolidation can be used to pay off different types of debt. These include:
- Credit card debt
- Personal loan debt
- Overdrafts
- Store Cards
What debts can’t I pay off through debt consolidation?
There are several debts that typically can’t be resolved through debt consolidation. Some of the most common ones include:
- Mortgage payments
- Car finance
- Court fines
Generally, if you’re trying to resolve a debt that is secured against an asset, you may be unable to do this through consolidation.
Potential advantages of consolidating your debts include the following:
You may be able to get a loan with a lower interest rate.
It may be easier to manage one debt with one lender rather than multiple debts with different lenders.
You may be able to reduce your monthly repayments (although you may pay more overall if you repay the loan over a longer period).
There are two types of debt consolidation loan:
Depending on your financial circumstances, you can apply for an unsecured or secured debt consolidation loan.
Unsecured – where the loan isn’t secured against your home or other assets. The rate you get will depend on your credit history, your finances, and the terms and conditions of the lender.
Secured – where the amount you’ve borrowed is secured against an asset, usually your home. However, if you fall behind with payments and can’t afford to repay what you owe, you’re at risk of your home being repossessed.
Debt consolidation loans that are secured against your home are sometimes called homeowner loans.
Because you are using your property as security against the debt, the lender may be more willing to consider larger loans at lower interest rates, as well as applications from people with poorer credit histories.
Particular care should be taken when using a secured loan for debt consolidation, especially if you are consolidating currently unsecured debts against your home or other asset, as you could lose the asset if you fail to keep up with repayments.
Risks of a debt consolidation loan:
Potential disadvantages of debt consolidation loans to consider are:
If you’re struggling to pay back the debts you have at the moment, you may not be able to afford payments to a debt consolidation loan.
You could end up paying more overall if the interest rate on your new loan is higher or you repay it over a longer period.
You need to factor in any early repayment charges on existing loans.
If you continue to borrow while paying off a debt consolidation loan, you risk getting caught in a cycle of debt.
If you use a secured loan to consolidate debt, your property or asset is at risk if you can’t keep up with repayments.
Is debt consolidation right for me?
You may want to consider debt consolidation if:
- You have multiple debts
- You are paying a higher interest rate on these debts than you could get by applying for a loan
- You have a good credit rating
- You have a stable job or a steady source of income
- Any money you would save on interest isn’t outweighed by any early repayment charges
- The total amount you would repay with the new loan is less than the total amount payable on your existing debts
Can I get a debt consolidation loan with bad credit?
You may be able to get a debt consolidation loan if you have a bad credit history. However, people with bad credit are likely to be charged a higher rate of interest than those with better credit histories, so it may not make financial sense to consolidate your debts. If this is the case, consolidation loans may not be the best option for you.