You may have heard of debt consolidation loans in the past and wondered if they’re the right solution to your debt. However, if you’re not sure what this type of loan is it can be hard to decide.
Read our guide to debt consolidation loans to help you make up your mind whether it’s the right solution for you.
What is a debt consolidation loan?
A debt consolidation loan is a loan you use to pay back some or all of the different creditors you owe money to. You then have fewer – or perhaps just one – repayments to make each month. This can make managing your finances a lot simpler as you don’t have as many different outgoings to keep track of and budget for.
Why would this benefit me?
If you currently have lots of debts you’re paying off, the main benefit of a debt consolidation loan is that you make just one payment a month. This is likely to come to less than you’re currently spending on multiple debt repayments.
When you’re paying off several different unsecured loans, all with different interest rates, it’s difficult to keep track and it can all add up to a sizable sum. However, with a debt consolidation loan, the interest you pay should be lower as you repay the debt over a longer period, meaning your monthly payments are smaller.
What types of debts can I pay off?
You can use a consolidation loan to pay off any debt, but it makes most sense to use it to repay the unsecured debts that have the highest interest attached to them. This will prevent the amount you have to pay back from piling up any further.
How much can I borrow?
Ocean Finance offers debt consolidation loans from £10,000 to £125,000. Get in touch with one of our advisors to find out more.
How long will it take to repay?
If you have several debts you want to consolidate, even if they’re all quite small, you’ll need to take out a fairly large sum to cover them all. It may take you a while to repay all of your debt consolidation loan, but you’ll know you can afford your monthly repayments.
How much will it cost
The interest attached to your debt consolidation loan may be lower than what you’re currently paying on your smaller unsecured loans (at Ocean Finance it’s 14.8% APR typical variable). However, because you will be repaying it over a longer period, you may end up paying more interest in total.
That shouldn’t necessarily put you off getting one though. Because you’ll have paid off your smaller debts, you’ll have just one monthly payment to make to your debt consolidation lenders, which can be far easier to manage. This could then reduce your risk of defaulting on payments and watching the interest mount up.
Do I need to own my home?
Traditionally, because debt consolidation loans can be for a large amount of money, the sum is secured against your property, which means you would have to be a homeowner. For this reason you should think very carefully about whether taking out a debt consolidation loan is the right decision, because if you don’t keep up with your repayments your home may be at risk of repossession.
An alternative is to use a personal loan to pay off your other debts. This would not be secured so your home would not be at risk, but the interest you pay may be higher.
Can I continue to use credit?
Yes. A debt consolidation loan does not usually affect your ability to borrow. However, you should think carefully about whether to take on more credit as this will increase the number of repayments you have to make, and you may end up in the same position you were in when you originally took out your consolidation loan.
Will my credit rating be affected?
No. You’ll have paid off your other debts using the consolidation loan, which is good for your credit rating. And, providing you keep up with your repayments on your new loan and don’t default, you could improve your credit score even more as it shows you’re a responsible borrower.
Is there another way to manage my debts?
One way to work out if a debt consolidation loan is for you is to work out a budget so you can be sure you can comfortably afford the repayments (including interest) each month. You should also be reasonably confident that your finances are not going to dramatically change during the term of the loan.
If you don’t think a debt consolidation loan is the best approach for you, there are other debt management options available – some of which will suit your circumstances, and others that might not. That’s why it’s so important to do your research and make sure you know exactly where your finances stand, so you can choose the solution that’s best for your needs.