Managing multiple debts can be a headache. Paying back money to more than one lender means you'll be managing multiple repayments of varying amounts at different times of the month, which can be confusing, and ultimately expensive.
If you are struggling to manage repayments on multiple debts, consolidation could be the answer. A debt consolidation loan is a way to help you to pay off debts sooner and make monthly payments more manageable.
There are many factors to keep in mind if you’re looking to consolidate different debts into a single loan, including repayment terms, credit rating and interest rates. Use this guide to help you decide whether debt consolidation is the right choice for your circumstances.
What is a debt consolidation loan?
A debt consolidation loan is a type of loan taken out to pay off the total of other existing debts you may have. You would then pay back what you have borrowed from one provider, at one rate, in more manageable instalments.
By merging outstanding debts, borrowers can sometimes save on their monthly repayments. Rather than owing money to many different lenders over different timeframes and at numerous interest rates, a good debt consolidation loan ties all debts together as one more affordable, more manageable loan.
What is the difference between secured and unsecured debt consolidation loans?
Like many other loans on the market, debt consolidation loans broadly fall into two categories:
- Secured loan: This loan is secured against your home or other assets. It means, if you fail to meet your repayments, your collateral may be used to cover the outstanding debt.
- Unsecured loan: This allows you to borrow a set amount of money, which is paid back over an agreed period. As it is unsecured, lenders will often use your credit rating and financial history to decide if you can make the repayments – and will typically charge a higher rate of interest to combat the higher risk of lending.
What can a debt consolidation loan be used for?
A debt consolidation loan can be used to pay off all your existing debts, including:
- Credit cards
- Unsecured loans
- Secured loans
- Car finance
- Store cards
Before paying off your debts, be mindful of any fees you may face for early repayment on products such as secured and unsecured loans.
Is a debt consolidation loan the right choice for me?
Whether debt consolidation is a good idea depends on your financial situation and the loan terms you have been offered.
Work out exactly how much your current debt will cost you to pay off. Then calculate how much it will cost you to pay off the consolidation loan in total over the full life of the loan. If the consolidation loan works out cheaper, it’s a good option. For instance, if you find a loan that offers a lower interest than you’re currently paying on your debts, you could save money each month.
It’s also important to double-check that the savings you make through taking out a consolidation loan aren’t undermined by other fees or charges.
What are the benefits of debt consolidation?
If you’re struggling to pay off a wide range of different types of debt, a debt consolidation loan can be an excellent way to take control. Here are just some of the advantages of debt consolidation:
May reduce your overall monthly outgoings
A debt consolidation loan allows you to merge all outstanding debts into one product, meaning that you owe just one lender. It can be a stressful time managing multiple debts, so bringing your debt under control with one single easy payment can make all the difference.
Spreading out the debt over a longer term can help lower your monthly payments, which will help to reduce your overall outgoings.
Flexibility of duration
With flexible terms, a debt consolidation loan allows you the opportunity to spread the costs over a term that suits you, anywhere from one to 25 years.
You’ll be able to prepare for payments coming out of your account each month and will have a set date for when all your debt will be fully paid off.
Improving your credit score
Struggling to keep on top of repayments for multiple debts could really impact upon your credit score. By compiling your debts with one lender and repaying the loan amount on time over the agreed period, your credit score could improve too.
If your current debts include store cards or credit cards with high interest rates, then a debt consolidation loan will generally help you to reduce costs by offering a lower interest rate. Compare the annual percentage rate (APR) and calculate the savings you could make by merging your debts into one loan with a single interest rate.
What are the disadvantages of debt consolidation?
The main risk is that the wrong consolidation loan could increase your overall repayments. Choosing a consolidation loan is only a sensible option if it reduces the total amount of interest you’re paying across your debts in the long run. Other disadvantages include:
May take you longer to pay off
Having the flexibility to choose the repayment term on a debt consolidation loan could mean that you end up repaying a debt for a longer time than you might expect.
Your property could be at risk
If you owe a lot of money, and have a poor credit history, a lender may offer you a secured loan where an asset, usually your home, will act as guarantee that you can repay the money borrowed. If you miss repayments, you could lose your home.
Debt management or debt consolidation?
Although they sound similar, debt management and consolidation are two fundamentally different approaches when it comes to looking at clearing your debts.
Debt management involves speaking to the businesses that you owe money to and agreeing affordable payments, whereas debt consolidation involves taking out a new loan to pay off your existing debts.
How to apply for a debt consolidation loan
To apply for a debt consolidation loan with Norton Finance, begin by telling us how much you’d like to borrow and over what period. Our loan calculator can help you get started on creating your debt consolidation plan, and show you the monthly repayments you could expect to pay if you’re successful in your application.
There are many things to think about before choosing to apply for a debt consolidation loan. Consider the drawbacks as well as the pros and take the advice of experts who can help you to decide. If it seems that a debt consolidation loan could be the answer, then take a look at our range of products.