Debt consolidation loans suit people who are in work and struggling with repayments, but who are otherwise financially secure enough to know that further borrowing should only be used to pay back what’s already owed.
How a debt consolidation loan works
You apply to a lender for a loan to reorganise or clear your debts. Generally you’d aim to pay off several higher-interest debts with one lower-interest loan, swapping some or all of your creditors for just one.
If you own your home, the lender will probably want to secure the loan on it. This means that if you don’t repay the debt, the lender has a claim on the proceeds if the property is sold.
You should get independent advice on whether this would be in your best interests.
Important: if you can’t keep up repayments on a remortgage or a secured loan taken out against your home, your lender may take action to repossess your home.
A consolidation loan will only help if:
- All of the loan is used to pay off some or all of your existing debts.
- The repayments on the new loan are no more than you already pay towards your existing debts, and you can afford them.
Otherwise, the new loan will simply add to your debt and make your problems worse.
Look very carefully at how long the loan will take to repay, how its interest compares with what you’re currently charged, and what charges or penalties apply, for example for late payments.
Caught in a cycle of consolidating?
If you keep consolidating debts, you will soon be unable to borrow again and unable to afford what you owe. If you keep adding debt to your mortgage, you are soon going to risk repossession. If this sounds like you, get debt advice.
Advantages
One payment
You make one monthly payment on one loan, rather than many payments to different creditors.
Lower payments
Your monthly payments may be lower, and at least should not be any higher.
Protects your credit rating
Because you’re not missing payments on your existing loans, your credit rating isn’t damaged.
Considerations
Arrangement fees
You may have to pay fees for arranging the loan. Always ask for full written details of all fees.
Poor credit rating?
If you have a poor credit rating, you may not be able to get a loan, or you may be offered poor terms such as a high interest rate.
Risk of repossession
If the loan is secured on your home or another asset, it could be taken from you if you don’t keep up the payments.
Changing interest rates
Interest rates often change over the life of a loan, making the total cost hard to work out. Check whether the rate is fixed or variable.
More expensive overall?
In the long run the cost could be greater, as the loan is normally spread over a longer period, so you may repay more interest in total.
Not clearing all your debts?
If you don’t clear all your existing borrowing, the new loan is likely to make your debt problems worse and your payments harder to keep up.
How we can help
We don’t offer loans. We can assess your situation and advise whether a consolidation loan, or another option, is suitable for you.