If you want to simplify your finances to help keep track of your payments, you may be thinking about consolidating your debts.
Applying for a loan is one way you can do this. This will provide you with a lump sum to pay off your existing unsecured credit balances – like your credit card, overdraft, store card and loan – leaving you with one manageable monthly outgoing.
And as the loan is likely to be fixed, the amount that you owe each month will be the same. You will pay off the loan in monthly instalments, including any added interest, until you clear the balance.
"Choose between a personal loan and a secured loan."
You can choose between a personal loan and a secured loan to consolidate your debts.
With a secured loan, the amount you borrow is attached to your home. This acts as a security net for the lender in the event that you fail to make your repayments. In this case, the lender has the right to repossess your home.
A personal loan, on the other hand, is not secured against any of your assets. Because of this, the interest rate tends to be higher on this type of loan.
Work out your budget
Before committing to taking out further credit, you must be sure that it’s not going to put added strain on your finances. The idea of consolidation is to help make your repayments more manageable.
With this in mind, you should work out how much you can realistically afford to pay each month. You can do this by using a loan calculator to give you an idea of what your repayments will look like. This way you’ll know whether your budget can stretch to include these.
Lenders will check that your credit history is in good shape before agreeing to lend to you. It will influence their decision on whether you are a responsible borrower and the interest rate they offer you.
Credit reference agencies – like Experian, Equifax and Callcredit- allow lenders to check your credit history. It’s a good idea to check your report to see what information is visible to lenders.
Remember, any negative marks can lower your chances of being accepted for the loan, so it’s vital you make sure everything is correct and up-to-date. The good news is that each of these agencies offers a free credit checking service – find out more here.
If you’re a homeowner, a secured loan may offer you the money you want at a lower rate. This is because the lender has the security of your home if you fail to repay.
Lenders will take account of the amount of equity in your home to determine the risk you pose. The lower your loan–to-value, the more equity lenders have as security, which could mean a lower interest rate for you.
If you’re thinking of applying for a secured loan, find out how to work out your loan-to-value here.
Weigh it up
Before you apply for a loan, shop around to see what lenders are offering. Bear in mind that applying for a number of loans in a short space of time can negatively affect your credit history.
For this reason, opt for a soft search tool – like Ocean’s Smart Search. Soft search tools let you narrow your search to products you’re eligible for, without it leaving a footprint on your credit history for other lenders to see.
When you apply
The application process will differ depending on the lender and the type of loan you apply for.
Lenders will ask you about your income and expenditure to gather a full understanding of your circumstances. You should expect to be asked about your property if you are applying for a secured loan.
With some lenders, you can complete the whole application online, although it’s likely that you’ll be asked to send in some documents as proof to complete the process.
And when you’re considering consolidating your debts, remember that rather than getting debt-free, you’re streamlining. Failure to keep on top of your new payments will damage your credit history.
For more information on debt consolidation and how it can help simplify your finances, click here.
Disclaimer: All information and links are correct at the time of publishing.