Debt consolidation: is it for you?

Debt consolidation: is it for you?

author: Bryony Pearce

By Bryony Pearce

Consolidating your debts comes with a number of benefits but, as always, there are things to consider too.

To work out whether a debt consolidation loan is right for you in the first instance, it’s really important that you fully understand what exactly it is. So, in this blog, we’ll be going back to basics as we explore what they are, how much you can borrow, things to consider, and alternative options.

Let’s get stuck in...

What is a debt consolidation loan?

Debt consolidation is a way of managing multiple debts, and the loans can be used to combine all or part of any unsecured debt you’re in. So, what does this look like in practice?

Let’s say you’re in £8,000’s worth of debt, and this debt is spread across two different credit card providers, one store card, and one personal loan lender. Each month, you’ve got four different balances to stick to, all of which are likely to be due on different days, carry different interest rates, and have different amounts to repay. Sounds confusing, right?

Well, with a debt consolidation loan, you could bundle all these borrowings together by taking out an £8,000 debt consolidation loan to clear all your existing debt. Then, you’d only need to make one monthly payment to one lender. 

Although this may sound like an attractive option, it’s important to keep in mind that there are drawbacks too – we’ll delve into these shortly.

Debt consolidation loan pros and cons

We’ve just explained one of the benefits of a debt consolidation loan is the fact it removes the hassle of juggling multiple lenders with different terms and dates, which can help with budgeting.

In addition, a debt consolidation loan could help you by reducing your monthly repayments – making your debts more affordable. However, this can come at a price. By reducing the amount you pay month-to-month, it’s likely you’ll have to repay your loan over a longer term, and this means:

1) it could take you longer to become debt-free

2) you may end up paying more interest in total

It’s therefore really important that you weigh up the pros and cons before making a decision.

Another benefit of taking out a debt consolidation loan comes in the form of interest rates. If you do your research and find a lender who offers a lower rate to what you’re currently paying, you’ll pay less overall, which could make it a cheaper way to clear your debt. But again, the length of your loan’s term could affect this. Even if the interest rate attached to your debt consolidation loan is lower, a longer loan term could mean you end up paying more interest in total.

You might also find the interest rate is higher than some of your existing debts. So, you’ll need to consider if the increased term or ease of consolidating all payments is worth the additional interest.

How much can you borrow?

First and foremost, you should only borrow the amount you need to clear what you owe. Whilst borrowing more might be tempting at the time, it could come back to bite you. Why? Because by owing the lender more money, you may end up repaying your debt consolidation loan over a longer period, which can increase the amount of interest you pay.

Secured debt consolidation loans

A secured debt consolidation loan is secured to an asset – usually your home. Because of this, you can typically borrow more money, making it better suited to those who have a larger sum of debt to repay. You need to consider if you want to secure your debt, which was previously unsecured, onto your home – as this means it may be at risk of being repossessed if you don’t keep up with the monthly loan repayments.

Unsecured debt consolidation loans

An unsecured debt consolidation loan is a personal loan. Because it isn’t secured to anything you own, you can usually expect to borrow less.

Debt consolidation loans with bad credit

If you’ve got a less-than-perfect credit history, a debt consolidation loan is by no means off the cards. In fact, many lenders specialise in providing loans to people who’ve struggled with credit in the past.

Although your credit history won’t necessarily stop you from being accepted for a debt consolidation loan, it might make it more expensive for you to borrow. This is because the best interest rates are often for people with better credit histories, so you might find that the interest rate attached to your debt consolidation loan is a lot higher if you have poor credit.

If you’re looking to consolidate debts you took out before you had bad credit, there’s a good chance the interest rates attached to your previous debts will be lower. You should, therefore, compare your existing interest rates and assess whether or not taking out a debt consolidation loan is a financially savvy option for you.

Alternative options

If you’ve got this far and you’re still not sure a debt consolidation loan is right for you, then don’t despair, because there are other options that may be available to you. Here are some tips to help:

Budget: Go through your income and outgoings with a fine toothcomb to see where savings can be made. This money could then go towards paying off what you owe early.

Savings: If you’ve got any savings stored away, could you put part of the total towards clearing your debts? If you do decide to dip into your savings though, remember to leave some aside for emergencies, so that you don’t end up in further debt if something unexpected crops up.

Friends and family: Could a friend or family member help you out? If you’re considering lending from your peers, make sure you’re completely confident you’ll be able to pay them back. It’s good to both agree in advance what your monthly payment is going to be, whether it’s affordable and when they’d like to be repaid by.

Although it’s not a typical credit agreement, it might still be a good idea to write down the terms of the agreement, so that you both have something to refer to at a later point.

Disclaimer: All information and links are correct at the time of publishing.

author: Bryony Pearce

By Bryony Pearce

Debt consolidation: is it for you? Debt consolidation: is it for you?