As the term suggests, a debt consolidation loan consolidates several debts into a single debt. Bear in mind, however, that this does not erase any debt; it just transfers your loans to a different lender/loan type. That way, you can make one easy payment per month and that’s that.
Did we mention that debt consolidation loans can really cover any kind of debt, including credit card debt and other liabilities?
There are essentially two types of debt consolidation loans:
- Secured: you “secure” it by providing collateral with an asset such as your house or car. Intended for loans above £25,000.
- Unsecured: preferred but much harder to obtain because they aren’t backed by assets. Generally approved if you’re borrowing up to £25,000.
You can apply for this kind of loan the way you usually would, through your bank or credit card company, for example. When approved, you make payments towards the new debt until it’s paid off completely.
The Advantages of Debt Consolidation Loans
This has its advantages. For example, it might lower your monthly payments (especially if your other debts have higher interest rates than your new loan) by lowering your interest rate and/or monthly payment. You will also have the opportunity to clear all your debts with one loan.
On top of all this, the interest rates are generally fixed so you’ll always know how much you have to pay over each repayment period and you will likely raise your credit score if you pay off the debt regularly. Hopefully, it will be much easier to track if you have just one instead of multiple debts.
What to Look Out For
There are a few caveats, though. Debt consolidation is a great idea if your interest rate will truly be lower compared to the one you have right now.
We would also recommend calculating how long it will take you to pay off this larger, consolidated loan compared to the several smaller ones you have. Remember – the longer it takes to pay off a debt, the more money you “lose” by having to pay interest rates.
Also, you’d have to be careful not to take out a larger loan that is larger than the amount you already have to pay off (should you combine the loans you’d previously taken out).
Another thing you have to look out for is that there aren’t any hidden fees that you might incur in order to clear your existing debts. You might be offered Payment Protection Insurance (PPI), for example, and might not even be eligible for it! Some experienced legal firms such as Optimal Solicitors offer free PPI checks so you don’t have to worry about this, and have extensive experience in dealing with packaged bank account claims and other financial miss-selling claims. We do hope it won’t come to this, but it’s best to be prepared.
All in all, to determine whether a debt consolidation loan is right for you, first of all, calculate how much you’re paying now (monthly) on existing loans and then how much you’d be paying with the new consolidated loan. If the latter is a larger sum, this might not be the option for you. Then, find a trusted bank or credit card company (check the fine print for hidden fees!) and compare interest rates. Soon, you’ll be well on your way to being debt-free!
