Taking out a loan is a big decision and it’s only natural you want to be informed from the outset – so, we’ve delved into the detail behind debt consolidation loans.
Managing multiple borrowings at once can be challenging, and perhaps even overwhelming at times. From keeping on top of who you owe money to, how much you owe, your monthly balance and how much is left to pay, it can be easy to get your head in a tizzy.
There are options to help make staying on top of debts more manageable, and a debt consolidation loan is one of them. So, to help you work out whether this option is right for you, we’ve taken a good look at what they are, when they should be used, and their pros and cons.
For example, if you’re in £3,000 worth of debt across two credit cards, £1,000 on a store card, and £8,000 in personal loans, that’s a total debt of £12,000. So, you could take out a £12,000 debt consolidation loan to package them all together, and pay the monthly balance off in one go.
Usually, debt consolidation loans will help to reduce how much you have to pay each month, making it a more affordable option to clear what you owe. But you may end up paying more overall and this often means increasing the terms or interest rates.
Deciding which one’s best suited to you will depend on a number of things, like:
How much you need to borrow
Whether or not you own your own home
How long you’d like your loan’s term to last for.
What kind of debts can be consolidated?
Debt consolidation loans can be used to combine any debts that can be paid off early, including: credit cards, overdrafts, loans, payday loans, tax arrears, bailiff debt, debt collection agency debt, and outstanding utility bills.
How much debt can be consolidated?
This will depend entirely on the type of debt consolidation loan you choose. The amount you’ll be able to borrow will vary from lender to lender, but you can probably expect to borrow more with a secured debt consolidation loan than you could with an unsecured debt consolidation loan.
Although you do have the option to consolidate your debts, it’s really important to remember that by doing this it may take you longer to repay your loan if you extend the term, meaning you could end up paying more interest.
When should debt consolidation loans be used?
You might consider taking out a debt consolidation loan if your current debts are becoming too much to keep on top of, as it’ll make your monthly repayments more manageable.
As with any type of lending though, you should only consider a debt consolidation loan if you’re confident you’ll still be able to stick to your monthly payment schedule.
It’s possible to save money when taking out a debt consolidation loan if you can find a better interest rate from a lender. However, the main purpose of one is to make paying off your debts less stressful and more straightforward. As mentioned previously, this could also mean paying back more interest overall if you extend the loan term.
Advantages of debt consolidation
There are several advantages that come part and parcel with debt consolidation loans. For starters, because you’ll only owe money to a single lender, they make your debts much more manageable, and take the confusion out of dealing with several different sums and lenders.
Secondly, they could be cheaper to pay off. This, however, will depend on a couple of interest rate-related factors:
1) Whether the interest rate you’re offered is lower than the interest rates you’re currently on. If a lot of what you owe is high-interest – like credit cards, for example – debt consolidation loans could save you money.
2) The term of your debt consolidation loan. Even if the interest rate is lower on your debt consolidation loan, if you’re repaying it over a longer term, collectively, you may end up paying more interest overall.
Last but not least, a debt consolidation loan could reduce your monthly repayments, making them more affordable. But remember, your monthly repayments may have only gone down if you have opted for a longer loan term, and this means it’s more likely to take you longer to repay your debts.
Things to consider about debt consolidation
Picking up from where we left off with the advantages, there are some things you should consider. The downside of choosing a longer term for your debt consolidation loan is that it could take longer to pay off, which means it’ll take you longer to become debt-free.
Another disadvantage is that, if you’re not careful, you could end up paying back more with a debt consolidation loan than you would juggling multiple lenders. This is why it’s crucial that you take the time to do your research from the very beginning, and work out how much you’d repay – with interest – with a debt consolidation loan, against how much you’d pay without one. You should consider if the additional interest is worth the ease of making one payment.
Not only that, but with a secured debt consolidation loan, your property is used as security by the lenders. This means that if you fail to keep up with your repayments, your home could be at risk of repossession.