Debt consolidation loans
Debt consolidation simply means moving all your borrowing, or at least a significant amount of it, into one loan. This allows you to close the various credit card and loan arrangements you had previously and use the consolidation loan to clear the debts. You will then make one monthly payment to your loan provider instead of various different lenders.
Advantages of a debt consolidation loan
- With all your debts in one place, you will only have one monthly payment to keep track of, making the management of your debt easier.
- It could improve your credit rating; closing down other loan and credit card accounts once you’ve consolidated your debt could show lenders that you are managing your finances responsibly.
Disadvantages of a debt consolidation loan
- Your repayment period may be extended by combining various different debts into one large repayment.
- You may also pay more interest over time than you would have if you paid off each debt individually. For example, you could pay less interest by moving an existing credit card balance to a balance transfer credit card offering a 0% introductory period on balance periods instead of moving it across to a debt consolidation loan.
Things to consider
- Interest rates are usually tiered depending on how much you borrow so once you work out how big a loan you will need, make sure to check the rate. Generally speaking, interest rates are usually lower the more you borrow, so if you are in a lower tier, you might consider borrowing a bit more in order to pay a lower rate of interest.
- Most debt consolidation loans are unsecured, which means the provider of the loans cannot claim your home if you are unable to keep up with repayments. However, there is other action the lender could take, and missing repayments will adversely affect your credit rating so you must make sure to keep up with your repayments.
- Check to see if any repayment charges apply to any existing loans you’re looking to pay off. If so, bear these in mind should you be in the position to pay off your loan early.
- Be wary of loans which are secured - this means that the debt will be held against your property.
For more information on loans, please see our guide to personal loans.