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The idea of being debt free is something many of us can only dream about. Life can get expensive, even if we keep outgoings to a minimum. No one wants to get into financial difficulty, but sometimes it may happen despite our best efforts. Personal circumstances could quickly change.
It might be that you're reading this because you are wondering how you could deal with all your existing debts. Perhaps you've found your monthly loan repayments have become unmanageable or you'd simply like to try and reduce those outgoings.
If you have debts you're struggling with, our guide on debt consolidation loans could help. Settle in and let's see where we can go from here.
A debt consolidation loan lets you take out a loan for a set amount and use it to clear existing debts. Some people may use it to clear credit card debt, existing loans, or other existing debt, such as payday loans.
So, the idea is that you might have two or more debts elsewhere. Very often, there could be a high interest rate on one or more of these.
Taking out a debt consolidation loan could give you the loan amount you need to clear the other loans, giving you just one loan to manage instead.
Typically, you'd look for a better interest rate than the ones you're paying on your existing loans or balances if you've got store or credit card debt. You then repay this new loan instead.
There are two broad types of debt consolidation loans that you may consider. We'll lay these out for you below, along with a few facts about each. This could help you work out which one is better for your situation.
Unsecured loans are just that - they're not secured on anything of value. Unsecured loans are also often called personal loans, so you may see the two terms used interchangeably.
An unsecured loan may be available from many banks, building societies, and other financial services companies.
The main perk to think about
Since you don't need to provide anything of value should you apply for a loan like this, you won't need to own your own home to consider one.
Given what we now know about unsecured debt consolidation loans, you can guess what's involved with secure loans. In this case, you'd need an asset - usually your home if you're a homeowner - to support your application.
A secured loan, therefore, carries more risk, although it is vital to remember that you are responsible for repaying any debts you take out in your name, no matter the type of loan you're considering.
As such, you must be sure you can repay any consolidation loan you're thinking of taking out.
A debt consolidation loan could have several advantages. Of course, it is important to consider all factors before you go ahead and compare debt consolidation loans or apply online.
We'll cover other pointers in a moment, but let's look at the plus points here.
If you're struggling to manage your existing debts, a debt consolidation loan could help you organise things better.
If you took out a debt consolidation loan, you could clear all those existing debts and have one loan amount to deal with rather than several.
It's easy to lose track of how much debt you need to repay if you've got three, four, or even more sources of debt with different lenders.
If you have this many loans in different places, you have the same number of repayments to make each month too... and these are also likely to occur on different dates.
If you're late with repayments, you could end up with fees and more interest to repay. It may also cause your credit history to take a knock.
Compare this to having one debt consolidation loan. One monthly repayment. One interest rate. Far simpler and much easier to keep track of.
Whether you get a secured or unsecured debt consolidation loan, you could end up with a lower rate compared to the ones you're paying on your existing debts.
If your existing borrowing is on credit cards, payday loans, or overdrafts, you could be on a much higher rate for each one. Looking for a loan offering a lower interest rate could mean you save a lot of money each month.
You might also be able to look for a fixed interest rate. This could mean fixing the rate for several years, giving you the same monthly payment every month, thus removing any uncertainty over multiple changing monthly payments.
Having multiple debts you struggle to keep up with can certainly harm your credit rating. However, if you manage a debt consolidation loan, with one monthly payment falling due on the same date each month, you could improve your credit rating and credit score instead of harming it.
It is important to remember that you must make repayments as agreed on time each month. If you miss any, it could harm your credit score, making it more difficult and expensive to get credit in future.
However, if managed properly and sensibly, a debt consolidation loan may help you in several ways, as we've seen here.
If you have credit or store cards and you only make the minimum repayments each month, it's likely that you may not be making much of a dent in the capital you've borrowed. You may only be paying off interest and treading water when it comes to reducing your balance.
With a single loan to replace all those debts, you could be in a better position to clear the debt more quickly. Your loan should be for a set period, which could be anything from one year to several years, depending on the amount you need to borrow.
With a monthly repayment designed to reflect the interest rate and the amount you borrowed, you'll always know where you stand.
We've covered the advantages of debt consolidation loans, but we need to cover other factors to give a rounded picture. Let's go through some pointers to think about here.
Personal loan debt consolidation can work if you know what you're doing and clear all existing debts without getting into further financial trouble.
For instance, if you take out a loan to wipe out another more expensive existing loan, or one or more balances on credit cards or store cards, you should be sure you don't run up balances again on those cards. It's tempting to do, but this could leave you in more debt.
When you consolidate debt, you're looking to pay less interest, reduce the size of your monthly payments, and clear your debt. You could do all these things, but only if you approach it responsibly.
You may be able to find credit cards with balance transfer offers for 0% interest. However, they often run for limited periods, incur fees when making the transfer, and then switch to a higher rate when the period ends.
This could mean you end up paying more for your monthly repayments once again than you would if you considered a loan for consolidation purposes.
It's true that a debt consolidation loan gives you just one payment to make each month rather than keeping track of several each month that may all fall due at different times. However, you still need to consider the bottom line.
Even though debt consolidation loans could be cheaper than repaying multiple other loans or debts, you still owe money. You still need to make payments from your bank account on time and for the correct amount each month.
So, you should consider your financial circumstances to make sure you can afford to manage this consolidation loan. A loan calculator could help you find out the loan amount you could manage to repay without running into problems.
Using a loan calculator before you apply for a debt consolidation loan might be a smart way to work out where you stand.
This may depend on the type of loan you take out and the terms attached to it. Those with fixed rates may have higher figures than variable rate loans.
However, they offer the peace of mind that you always know how much you need to pay each month. In times of uncertainty, when you've got other bills and outgoings to think about, this could be better for you.
Always think about all the possibilities before you apply for anything - whether you're looking at secured loans or unsecured ones.
They could if you are forgetful in making payments, or worse, fall behind with them. Some people see these loans as saviours - a way to clear all existing loans and be left with just one manageable one.
However, the debt is still there - just in a different form. It is vital to understand this and to make sure you use it responsibly and don't incur more debt afterward. Missing payments or running up more debt could lead to a drop in your credit score.
If you have a good credit history now, you could end up harming it and edging toward bad credit - and that could take a while to put right.
Missing any payments, whether for loans, car insurance, or anything else, could be detrimental. It's best to get into a habit of setting up direct debit payments if you can, as it takes the strain of trying to remember how much to pay and when.
Debt consolidation loans work in different ways depending on various factors. Some lenders may offer them to those with a good credit rating, whereas others might focus on individuals with bad credit.
Aside from this, there could be arrangement fees involved in some cases. There may also be early repayment fees if you find yourself in a situation whereby you could clear the loan early, ahead of the agreed end date.
Check the details for any personal loans you look at for consolidation purposes. You should always do this, of course, but it's helpful in this scenario too.
Yes. Terms such as representative APR, maximum APR, and even annual interest rate could get confusing for some. APR means annual percentage rate, so you can see whether one loan could be better than another by comparing them more easily.
It's also sensible to know your credit score in advance. Since some lenders focus on helping those with certain credit ratings, you might be able to look at loans for those in your category. You could then get a representative APR for each one, to see whether you could spot a reasonable offer for those with your credit score.
Responsible lenders operating within the rules and regulations of the industry are monitored by the Prudential Regulation Authority, part of the Bank of England. Look for firms regulated by the Financial Conduct Authority too, as it gives you peace of mind that you're looking at responsible lenders. The Prudential Regulation Authority (PRA) and FCA are there to give you protection.
Regardless of your credit score, we may be able to help you find the loan you're looking for to help consolidate your debts. If you're a UK resident and you'd like to find out more, use our free online tool today. We're a credit broker rather than a lender, and we have a registered office in Glasgow. All above board!
It's simple to do and you just need to complete a few pieces of information. We'll see which of our lenders could serve you with a loan that could help you manage your debts more effectively.
We're here to help, and it's faster to use our service than to go it alone and explore the huge world of debt consolidation loans. Just remember to consider all aspects of your financial situation first, so you know how much you might want to borrow, whether to choose a fixed or variable rate and perhaps most importantly, how not to get deeper into debt in the future.
Loanza could be the way for you to find a solution. If you're ready to find out more and to see which quote could suit you, you're one step away from completing our handy online form. And just to be clear, we make no charge for you to use our service. See the possibilities today and where they might lead.