Are you struggling to keep on top of your repayments?
Perhaps you have a number of credit cards or loans with different balances and rates.
If you do, it can be difficult to keep track of what you owe.
Plus, if you’ve come close to missing any payments because you’re juggling various payment dates, your credit history will have been at risk of damage. This is something you’ll want to avoid.
How can a debt consolidation loan help?
With a consolidation loan, typically you’ll work out what the combined balance is of your current unsecured borrowing (like credit cards, store cards, overdrafts and personal loans) and apply for a loan of this amount. You then use this money to pay off these debts, and replace multiple monthly repayments with just one.
So, rather than juggling multiple interest rates and payment dates, you’ll have one fixed amount to pay each month to your new lender until you clear the loan balance. This can help you get back on track with your finances.
What do I also need to consider?
Just bear in mind that there’s no guarantee the loan will be a cheaper way of clearing your debts. To make your monthly payments more affordable, it might be the case that you’ll make repayments for longer and pay more interest overall than you would have on your original agreements. Also, if you already have a bad credit history, you might not be eligible to borrow more.
If you’re a homeowner, you’ll have to weigh up whether a secured or an unsecured loan is the better option for you. The type of loan you opt for will also depend on the overall balance of your debts, and your credit history.
Will I be able to get a loan?
If you’ve been unreliable when borrowing in the past (making payments late or missing them altogether), this is likely to affect your ability to borrow in the future. And some loan providers might be put off lending to you. As a result, you could struggle to get a debt consolidation loan.
However, bad credit doesn’t always mean you’ll be turned away. Some lenders specialise in lending to people with bad credit.
But because you present a greater risk, you might be offered a higher interest rate. This is why it’s important to weigh up your options to find a loan that suits you.
Will my credit history improve?
By repaying what you owe on time each month, your credit history will gradually improve.
If you no longer have to juggle several different lenders, rates and dates, this can help reduce the chances of you missing a payment.
When you miss a payment, the credit reference agencies - Experian, Equifax and TransUnion – are informed and your credit history is marked. This footprint will be visible to you and any lenders who look at your credit history.
When you apply
You should bear in mind that each time you apply for credit, it leaves a footprint on your credit history. If lenders can see that you’ve applied to a number of other lenders in a short space of time, they might get the impression you’re desperate to get your hands on more cash. This is likely to put them off lending to you.
With this in mind, if you feel that a consolidation loan is the best option for you, it’s a good idea to use a soft search tool first to check your eligibility before you apply.
Before you apply, it’s vital you work out whether the monthly repayments will be affordable. Remember, if you fail to repay your debt consolidation loan on time, this will cause problems for your credit history.
Disclaimer: All information and links are correct at the time of publishing.