If you struggle with multiple, high-interest debts, a debt consolidation loan can give you a breath of fresh air and help you regain control of your finances.
Here’s everything you need to know about debt consolidation loans.
What Are Debt Consolidation Loans?
Debt consolidation loans are types of loans you use to streamline your debts into one for effortless monthly payments.
It can get overwhelming if you make different payments for various loans like credit cards, personal loans, store cards, or overdrafts each month.
Debt consolidation loans allow you to consolidate such debts and cover the total amount, so you’re only left repaying one lender instead of multiple creditors.
How Do Debt Consolidation Loans Work?
Debt consolidation loans relieve you from debts by giving you an affordable repayment period and reducing your monthly payments. The process is pretty straightforward.
The loan may allow you to get the funds needed to cover all your existing debts and pay them off at once.
Once you pay off all your creditors, all that’s left is one fixed-rate monthly repayment to the consolidation loans lender instead of multiple monthly repayments.
It may help you save money you’d spend on interest with multiple creditors. You’ll also get a reduced repayment amount that frees up your finances for other bills and a set repayment schedule for the entire loan period for easier budgeting.
You don’t have to balance several debts each month or borrow from one lender to pay the next with debt consolidation.
Suitability Of Debt Consolidation Loans
You have to consider whether debt consolidation loans are suitable for you, depending on your circumstances.
It’s right for you if you’re having trouble paying off multiple high-interest debts and you need a debt solution to get you out of the monthly panic and stress of trying to make ends meet.
A consolidation loan will make managing your finances much more effortless. It’s only suitable if the loan amount puts you in a better financial situation. Before taking out a debt consolidation loan, ensure you review your existing debts i.e interest rates, terms, balances etc.
Debt consolidation loans may be suitable if you don’t see a way out of multiple mounting debts, need to reduce monthly repayments, and get extra cash flow and control of your finances.
Even with a bad or poor credit history, many understanding lenders in the UK may help you acquire a debt consolidation loan provided you can afford repayments and are eligible.
Debt consolidation loans for bad credit borrowers may feature capped loan amounts or higher interest rates to reflect the higher lender risk.
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Eligibility Criteria for Debt Consolidation Loans
Although each lender will have their criteria, some of the essential criteria considered include:
- You’re at least 18 years old.
- You’re a permanent UK resident.
- You can prove regular income or are employed.
- You’re not bankrupt and haven’t applied for bankruptcy.
Advantages of Debt Consolidation Loans
You need to consider the different pros and cons of debt consolidation loans to make an informed decision. These include:
Reduced And Easy To Manage Monthly Payments
When you consolidate your debts, you get a reduced monthly repayment to one lender instead of struggling to repay different amounts to different creditors. The fixed monthly payment makes it easier to budget than various debts with different rates and repayment dates.
Easier To Get Out Of Debt
A debt consolidation loan features a single rate of interest that can make it easier to clear your debts sooner. With multiple loans with varying interest rates, most of your repayments go to servicing the interest instead of reducing your balance.
Peace Of Mind
The weight of multiple debts can drain you mentally and physically. It allows you to pay off all your existing debts and only deal with one lender with a debt consolidation loan.
Extended Repayment Period
Debt consolidation loans allow you to repay for longer, which reduces your monthly expenses. You’ll no longer have to worry about missing repayments or the mounting charges of short-term loans.
Disadvantages of Debt Consolidation Loans
Repayments May Not Reduce
Depending on how much you’re currently repaying and over what period, a debt consolidation loan may not reduce your repayments. Additionally, it will not erase your debts. It’s more like a new payment plan and not a form of debt settlement or relief.
You May End Up Paying More Overall
The amount repaid at the end of the term may be higher than the previous individual payments with a more extended repayment period. Therefore, you have to ensure a more prolonged period guarantees you peace of mind, and you can afford to make the repayments.
Considerations When Applying for Debt Consolidation Loans
Things to consider before or when applying for a debt consolidation loan include:
Repayment Cost
You need to decide whether consolidating your debts is a better option than making individual repayments. You can do this by comparing how much you’re currently paying vs. what you’ll be spending in the new repayment structure of a debt consolidation loan.
Affordability
Ensure you can comfortably make repayments over the chosen period without fail. Review your monthly income and how much goes to necessary expenses to determine what remains for loan repayment.
Credit Score Impact
Lenders run credit checks when you apply for any credit, which can lower your credit score. Closing debt accounts as you consolidate your debts will also impact your credit rating. However, with debt consolidation loans, the effect on your credit score is only temporary.
Over time it will help you improve your credit score thanks to affordable monthly repayments. As you repay each month, your credit score improves while showing lenders you’re a trustworthy borrower.
Debt Consolidation Loans Final Thoughts
While other debt solutions exist, debt consolidation features less severe consequences. It’s suitable if you’re looking for an extended period to repay and reduce monthly expenses that help you regain sanity and control over your finances.
Give Mortgageable a call today at 01925 906 210 or contact us to speak to one of our friendly advisors.
