A debt consolidation loan combines multiple smaller debts and stops harassment from creditors in it's tracks.
It not only allows you to simplify your finances but can help you free up some income and reduce the stress that comes along with being over indebted.
Types of debt consolidation in the UK
It is advisable to apply for a debt consolidation only when you are failing to make minimum payments of all your loans as well as credit cards. A debt consolidation loan can help you boost your credit score, provided you repay the loan on time.
There are two types of debt consolidation loans. However, both types allow you to borrow enough money to pay off all your current debts and owe money to just one lender.
- Unsecured debt consolidation loan – it is when the loan is taken without collateral. Unsecured debt consolidation loans offer smaller amounts compared to a secured consolidation loan. Although they offer smaller amounts, they have the highest interest rates and charges.
- Secured debt consolidation loans – with secured consolidation loans you are required to secure your loan. Usually, loan collateral are cars and houses. You stand a chance of having a secured loan mostly when you owe a lot of money or if you have a poor credit history. Secured loans offer the highest funds with affordable interest rates. You can even use equity in your home to consolidate other debts.
Is it a good idea to consolidate debts?
Debt consolidation is always a great idea, when you are consolidating debts, you are not only one step ahead of living a debt free life, but you are also freeing yourself from stresses, and depression.
With debt consolidation, you get the opportunity of limiting your expenses and you are no longer having to pay several different interest rates you are only required to pay one lender with one interest rate.
This is also a great time to get a copy of your credit report and review your finances overall. You can do this by reviewing your budget and improving it where needed.
A budget also works well with a debt repayment plan that includes the new consolidation loan repayment as well as any other loans including your home loan and car loan.
Where can you get a debt consolidation loan
In the UK, debt consolidation can be applied for from many online lenders as well as traditional banks. Every lender or bank has its pros and cons. However, all the debt consolidation loans are designed to meet each need.
Furthermore, when applying for it, many lenders will do a credit check. Credit checks help lenders design a bad credit loan term that is suitable for you. You can also apply for a debt consolidation loan via a peer-to-peer lender or platform if you have good credit as these lenders offer the lowest interest rates on loans.
When should you consider a debt consolidation
Before you opt to consolidate your debts, you should firstly think about anything that might happen in the future which could stop you from keeping up with repayments, such as interest rates increases, or you get sick or your work contract gets terminated. However, debt consolidation only makes sense when
- You are certain that you will manage the repayments until the loan is fully repaid.
- Use a debt consolidation loan as an opportunity to cut your spending and get back on track in achieving your financial goals, no matter what they may be.
- With debt consolidation, you end up paying less interest than you were paying before and the total amount payable is less. However, it could be more if you repay over a longer period.
Always avoid applying for a debt consolidation loan when:
You can always turn to a debt consolidation loan when you want to clear your credit record and live a debt-free life. However, you should never turn to a debt consolidation loan when the following might happen.
- Firstly, if your financial status can’t afford the new loan payments never start the application process
- You cannot clear all your debts with the loan
- When the monthly repayment being higher, or the term of the agreement is longer resulting in you paying more
- Although debt consolidation can help you repay all your loans, it is not always the case. When you cannot afford to take a new loan, you need help sorting out your debts rather than a new loan. Make use of a debt adviser, it might be able to negotiate with your creditors and arrange a repayment plan.
Debt consolidation loan comes with a lot of benefits
A consolidation loan is a personal loan that brings light during your dark moments. It has great benefits, provided that you keep on repaying your loan as promised.
- A debt consolidation loan will make your total monthly repayment towards debt lower so you will have more disposable income
- You have one monthly repayment amount instead of various individual ones which makes it easier to manage your finances
- You are less likely to miss a payment, which helps you maintain a good credit profile and improve your credit score.
Who can apply for a debt consolidation loan?
- Before applying for a debt consolidation loan, you should be over 18 years
- You must have debts that qualify to be consolidated such as unsecured loans which can take the form of credit card debts and personal loans
- Be a UK resident
- Be permanently employed
- Have a UK bank account since some lenders will direct the funds to your bank
Let a debt consolidation loan work for you
As much as the debt consolidation consists of lesser interest rates when you fail to repay it can badly affect your credit score. Furthermore, as much as it a great opportunity to change your financial status, it is not for everyone. Never apply for it if you cannot afford its installments.
Debt consolidation should be improving your credit profile, does not destroy it. Seek professional advice before considering debt consolidation.