Guide To Debt Consolidation Loans

If you are facing a difficult time with your finances, whether that's constant money worries or juggling payments to multiple lenders, you're certainly not alone. As a nation, the UK owes more than £1 trillion. Instead of trying to pay off just the minimum amount for each debt, your debt could be reduced into one just one manageable payment each month using a debt consolidation loan. But, you will need to look at the relevant issues to see whether you need to consolidate debt and if may be the right option for you.

What is a debt consolidation loan?

A debt consolidation loan pays off any existing debts and transfers all the debt owed into just one loan with one easily manageable, payment each month. You'll still need to pay back the money owed, but using a loan to consolidate debt in this way you will be able to reduce your monthly expenses, by paying lower interest rates, or spread the repayments over a much longer term (time period).

Is Debt Consolidation The Answer?

Consolidating your debts

Taking the first steps to consolidate debt can be a daunting prospect, especially if it's something you've shied away from for a long time. But, there's no need to worry. By consolidating debt you can make your own personal finances more manageable because you are replacing multiple debts with just one low for all of them. Effectively, you will be making just one payment every month to one creditor.

Loans like payday loans, credit cards, and other personal loans have high interest rates mean that borrowers who do not have enough income may be struggling. Saving money and being able to control your finances are just two of the many reasons why people who are struggling with more than one large unmanageable loans are looking to consolidate debt.

Does it make sense to consolidate your debts?

One of the first things you need to think about is to work out how much you can realistically afford to pay each month, taking all your other expenses, e.g. bills, rent, mortgage, everyday living costs into account. You need to ensure that you do not take on so much debt that you will not be held to handle it. If you can't afford a reasonable monthly payment, then consolidating debt will not be a solution for your problem to look for another option to help improve your finances.

Ever had bad credit?

If you have fallen behind with any of the payments for your existing debt (for example, you may have received demand or final notice letters from your current creditors), and this has subsequently affected your credit rating, then debt consolidation may not be the best choice at this point in time. The reason being, as is to obtain favourable loan interest rates, a good credit score is recommended.

Things to consider if you want to consolidate debt

Before considering consolidating debts, you should take a step back and make sure it makes financial sense for you. A debt consolidation loan may have different interest rates and terms which you should take into consideration.

Don't even think about consolidating debt which is unsecured (e.g. personal loans like credit cards) using a loan that's secured against your own home, because if you miss payments in the future, your property will be put at risk, i.e. the lender may apply for repossession if you have made no attempt to contact them or arrange a payment plan.

If you do decide to consolidate debt, make sure you fully clear your current debts completely (you could also write to the finance company to cancel the limits or even destroy your credit card or store card). It's always tempting to keep your accounts open thinking you never know when you may face an emergency so keep your card limit at the same levels. Not a good idea. You can easily be tempted to build yourself into further debt and then over-committing yourself again, leaving you in an even worse position than you already are in.

It's important you understand the total amount you will have to repay for the loan (total charge for credit). If the loan is extended over a much longer term and has more interest than the current debts, you'll need to work out whether it's the right option for you.

Top 3 Reasons take out a debt consolidation loan

If you're careful about managing your spending, then using a debt consolidation loan to consolidate debt can help by:

Reducing monthly payments

Spreading out the term of your debt often reduces monthly repayments into something more manageable. Most people often pay the minimum payment allowed on their existing debts. In many cases, this just means they'll be covering only the loan's interest portion, whilst the actual total balance that's owed remains unchanged.

Reducing the interest paid

If you have multiple debts with credit or store cards that are at high interest rates, in general, you'll need to pay back less interest on your debt using a debt consolidation loan. Just ensure you stop all that spending on your cards!

Improving your credit rating

If can successfully pay off your loan without accumulating any further debt, then you're likely to notice a positive impact on your credit rating. You may also like to check your credit report before applying for a debt consolidation loan.

How do you apply for a debt consolidation loan?

To check whether you're eligible for a loan, a lender will calculate how much outstanding debt you currently have and then asses your potential credit risk.

If you've already had a previous history of bad credit or taking out large debts, lenders may only offer a secured loan, in order to reduce their risk. This means they will need to use your property to be secured against your loan. You will need to be make absolutely certain that you can make the loan repayments, because your house may be at risk, should you continually miss your repayments.

Why should you consolidate your debts?

There are many reasons why people want to consolidate debt. Having only one repayment to pay will reduce the stress and worry of having late repayments. Those who are trapped in a debt cycle with final demand letters multiple creditors and can't manage to get out from the cycles of borrowing, can get back on track. All it takes is a little motivation and have self discipline. A debt free life can still be achievable especially if the borrower doesn't want to experience the same situation again.