The findings also estimate the average loan size people will apply for is £11,400, which is 18% more than usual. But what is a personal loan and how can it be used for debt consolidation?
What is a personal loan?
A personal loan tends to provide a lump-sum of money that you repay in equal monthly payments including interest. It’s also referred to as an unsecured loan.
What is debt consolidation?
If you have various forms of credit ranging from credit cards and store cards to overdrafts and personal loans - all with different interest rates and payments dates – you might find the situation confusing. It may even start to get on top of you.
If you miss a payment on your credit agreements, it can lead to late fees or missed payment charges. It can also have a negative impact on your credit history.
Debt consolidation lets you borrow money to pay off all your existing credit agreements. So, instead of making multiple repayments with different interest rates, you will make a single payment each month to cover all your outstanding credit agreements.
How much can I consolidate with a debt consolidation loan?
It all depends on how much you need to pay off your debts.
For example, if you owe a total of £7,365.80 across credit cards (£5,000), store cards (£2,000) and money owed to your overdraft (£365.80), you could take out a personal loan for £7,500 to pay off your debts and leave you with an additional £134.20. Or you could just borrow the exact amount you need and no more.
This will mean you owe money to one provider rather than several, so you’ll be making one payment every month of a fixed sum. Depending on the interest you’re charged, your single payment could set you back less than your previous, multiple payments did.
What about a secured loan?
So far, we’ve talked about personal loans, but you can also use a secured loan to consolidate your debts. Also know as a homeowner loan, this type of loan is secured to your property – so you must own one to qualify.
Because lenders have an additional layer of security with this type of loan, it may be possible to borrow a larger sum and pay it back over a longer period than with a personal loan.