Debt Consolidation
A debt consolidation loan is an option if you have a lot of different debts and struggling to keep up with the repayments. With debt consolidation, you can merge all of your repayments together into one loan and lower the monthly payments. You can borrow enough money to pay all of your current debts and owe money to just one lender.
Advantages
- Reduce the number of monthly payments
- Makes keeping up with payments simpler
- Dealing with one creditor should be easier than lots of different ones
Disadvantages
- Due to having a low credit rating, you might have to pay higher interest rates and end up paying more due to the interest you pay over the life of the loan
- You might have to pay larger monthly payments but over a shorter period of time depending on the terms of the loan
- Debt consolidation loans can often come with additional fees and charges so you will need to do the sums
What are the different types of loans?
Secured loan
A secured loan is when debt is secured against a property. This is a bit like taking out another mortgage. If the loan cannot be paid back, the loan company could sell the property. Due to this we would say to make sure you can afford to repay the loan before you make an agreement.
A secured loan is usually cheaper than an unsecured loan due to the lender being able to sell your assets if you don’t keep up with your repayments.
Unsecured loan
This is also known as a personal loan. Difficulty keeping up with your repayments will affect your credit rating, but the loan company cannot repossess your home. They could however take you to court for non payment which could incur extra costs.
How can I get a debt consolidation loan?
If you choose a debt consolidation loan, it is highly advised that you ‘shop around’ using comparison websites to find the best deal. It is also advised seeking additional advice before making a final decision as other solutions may be much more suitable - we can help you with this. Make sure you compare the APR (Annual Percentage Rate) or the APRC for secured loans as this will include additional costs such as an arrangement fee.
Fees and charges for debt consolidation
- Beware of any fees that may be charged for arranging the loan
- Always read the small print carefully for any extra fees or changes before you sign anything
- Check whether there are any fees for paying off existing loans early as this could impact any potential savings you wish to make
- Avoid paying a fee for a company to arrange the loan on your behalf, unless you are getting advice and you are sure it is worth the cost
When does a debt consolidation loan not make sense?
- If you cannot afford the new loan monthly repayments
- If the loan does not clear all of your debts
- If you end up paying more overall (due to monthly repayments being higher or the term of the agreement lasting longer)
- If other options are worth exploring
For help with debt, speak to our friendly One Money team of specialist advisers on 0330 355 1000 or email onemoney@onemanchester.co.uk