Dealing with debt can be difficult, especially if you have a number of different credit cards or loans you're trying to manage at once. 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 not only confusing, but also more expensive in the long run if you're paying interest on each individual debt.
One way to make your debt easier to handle can be a debt consolidation loan, which brings all of the money you owe into one more manageable place, often making it easier and more affordable to get yourself out of debt.
Depending on the type of debt consolidation you opt for, you could save money over time by securing a lower APR. It is always better to shop around for the best interest rate for a debt consolidation loan by visiting a loan broker or price comparison site.
There are many factors to keep in mind if you’re looking to consolidate your debts into a single loan, including repayment terms, credit rating and interest rates. Use this guide to help you decide whether or not 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. It allows you to pay back the money you owe to multiple lenders in one go, transferring what you owe to one lender, before paying this back at a fixed interest rate and often with terms more suited to your personal needs.
There are two types of debt consolidation loans available, depending on your personal financial situation:
- 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. This gives lenders security for loan applicants with low credit or bad credit history, meaning they may offer rates that are more favourable. However, failing to meet the repayments could put your home or possessions at risk.
- Unsecured loan: This allows you to borrow a set amount of money, which is paid back over an agreed period of time. 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
Rather than making payments every month to all your existing debtors, you would instead borrow the money to repay them all. Your new debt would then consist of one payment, at one rate.
Before paying off your debts, be mindful of any fees you may face for early repayment on products such as secured and unsecured loans.
Why should you consider a debt consolidation loan?
Consolidating your debts into one repayment plan can help you get a clearer view of your finances and plan for the future. You’ll be able to prepare for payments coming out of your account each month, and will have one set date for when all your debt will be fully paid off, which is often far earlier than it would have otherwise been.
Debt consolidation removes the hassle of multiple lenders and interest rates, making it arguably much easier to manage your payments. Not only that, you may also be able to lower the total amount you pay back each month as you’re only paying one lender. Helping you to start afresh, a debt consolidation loan allows you to choose the amount you need and the terms that work best for you.
No matter your situation, debt consolidation can relieve financial strain and allow you to see an end to your debt. Meet your repayments on time and it is possible to boost your credit score too.
Is a debt consolidation loan the right choice?
Whether or not debt consolidation is a good idea depends on your financial situation and the loan terms you have been offered. 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.
However, make sure this low interest offer isn’t counteracted with a much longer repayment plan. It could mean you’d still end up paying the same amount, or even more, in the end. Additionally, if you do find a low interest debt consolidation loan, and you can afford to pay more each month over a shorter period, you could get on top of your finances and become debt-free much sooner.
By compiling your debts with one lender and repaying the loan amount on time over the agreed period, your credit score could improve too.
Ready to take control of your finances? See more information on our debt consolidation loans. We search the market to find the best lender for your situation, including flexible terms and poor credit options.