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What are debt consolidation loans?

Sometimes it can be a struggle to keep track of different payments at different times, when one single regular payment could help improve your financial situation. We look at debt consolidation loans to see if they are right for you.

Managing multiple debts can be an administration headache – could debt consolidation help give you back control over your financial situation?

If you are struggling to manage the repayments on multiple debts, the chance to combine them into one single loan could help improve your financial situation. A debt consolidation loan is a possible way to help you to pay off debts sooner, and make your monthly payments more manageable.

A debt consolidation loan works by borrowing the money you need to pay off other existing debts in one go. You would then pay back what you have borrowed from one provider, at one rate, in negotiable instalments. By taking out a debt consolidation loan you are streamlining all the admin and potentially saving money on fees and rates at the same time.

This type of loan has its positives and negatives, so consider both before deciding whether this is the right product for you.

 

Positives of debt consolidation loans:

 

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 back under your 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 monthly outgoings.

 

Flexibility of duration

Work out what you can afford to pay each month, so that you stay in control of your money. With flexible terms, a debt consolidation loan allows you the opportunity to spread the costs over a term that suits you, anywhere from 1 to 25 years. You can then avoid spending unnecessarily on multiple debts, as a debt consolidation loan can help you to manage your money better.

 

Improving your credit score

Struggling to keep on top of repayments for multiple debts could really impact upon your credit score. Future lenders will respond more positively to someone who can manage their debt responsibly, so taking charge of your financial situation now could benefit you in the long term. A debt consolidation loan could help you to demonstrate that you can repay the money that you borrow, and improve your credit score.

 

Reduces interest

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) on a range of products, and calculate the savings you could make on a monthly basis by merging your debts into one loan with a single interest rate.

 

Cons of debt consolidation

 

May take you longer to pay off

Having the flexibility to choose the repayment term on a debt consolidation loan, to help reduce those monthly payments, could mean that you end up repaying a debt for a longer time than you might expect. Consider alternatives to reducing your debt too, by assessing your monthly budget and seeing where you can make immediate savings with any other expenses and outgoings.

 

A secured loan means your property is at risk if you do not keep up repayments

Debt consolidation loans can be unsecured or secured, depending on your financial situation. 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. It is therefore important to understand that if you miss repayments, you could lose your home.

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 to your debt problems, then take a look at our range of products for further information.


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