Debt consolidation loans
A debt consolidation loan is when you move all of your debts into one, bigger loan. This means you only have one monthly repayment to keep track of, one creditor to deal with and your other debts are essentially paid off.
We understand that dealing with multiple debts can be overwhelming, and the admin involved can become too much – but before you take a debt consolidation loan you must consider very carefully whether it will actually benefit you in the long run. The ease of a debt consolidation loan is what most people are drawn to, but it can actually negatively affect your situation.
To help, we’ve put together some information about debt consolidation loans to ensure you make the right decision for you:
The pros and cons of a debt consolidation loan
Take a look at this table, which aims to break down the pros and cons of this type of loan. It could help with your initial decision before you speak to an expert.
If you can consolidate debts before you miss any repayments on single loans, you could prevent your credit rating from dropping. This may also avoid you having default notices issued against you.
You will be taking out more credit, probably at a higher interest rate, which could get you in financial trouble in the future if you start to struggle with repayments for whatever reason.
If the debt consolidation loan is cheaper than the interest rate on the multiple loans combined you could pay less money on a monthly basis.
The term length of consolidation loans are longer, so you’ll usually end up paying more over this time, than you would if you’d carried on with multiple repayments or taking on a different debt solution.
You only have to deal with one creditor and one monthly repayment, which makes admin easier.
You may have to pay fees and charges to complete your debts early. These may eat up any savings you may have and leave you out of pocket.
If you have a secured debt consolidation loan, the interest rates are low but your home is at an increased risk of repossession if you fall behind on your repayments.
The interest rate may only be low for a limited time, so you need to check the small print carefully.
You may be tempted to start using your credit cards again if they are cleared, which could see you get into more financial trouble on top of what you’re already paying.
If you already have a low credit rating then the debt consolidation loan will be offered at a much higher rate. This can make it harder to sustain payment wise, over time.
You can choose from two types of debt consolidation loan. These are:
- Secured – this means the amount you borrow is put against an asset, such as your home, and if you miss any repayments the lender can repossess your property.
- Unsecured – this means the loan isn’t secured against your assets and provides a little less risk.
However, PayPlan clients have often found that consolidating their debts before seeking professional and free debt advice from an organisation like ours, failed to solve their problem and even increased their debt levels.
Some people consolidate their debt – such as credit cards – into a personal unsecured loan or even move their credit card debt onto a brand new 0% interest one. However, to do this you need to have a good credit rating to get the best deal, which is why it is not an option for many.
Should I consolidate my debt?
You should only consolidate your debt if:
- You are certain that you will be better off financially.
- The repayments on a new loan are lower than all of your multiple debts combined.
- And if they are not, you are confident that you can keep up with the higher repayments and interest rates that a debt consolidation loan will inevitably feature.
Before taking on debt consolidation, please speak to our expert team for free debt advice and information about the other possible solutions that could work for you.
How to consolidate debt
While it’s not a debt solution we recommend without seeking expert financial advice first, if you are interested in how the process works and how to consolidate debt, then here is what you can do:
- Speak to an impartial finance expert about your situation- call the PayPlan team on 0800 280 1816 or use our debt help form.
- Compare debt consolidation loans and find the best deal on comparison sites.
- Check the interest rate carefully. Don’t just look at the main interest rate, check for extra charges too, such as arrangement fees.
- Apply for a debt consolidation loan and select the debts that you wish to pay off and move them onto this one credit product.
What is an alternative to a debt consolidation loan?
There are many debt solutions out there, that may benefit you more than a debt consolidation loan could. They also offer managed, single monthly repayments that cut out the issue of dealing with multiple lenders and can even remove future fees and charges.
Debt Management Plan
This is an informal solution that you can set up yourself with your creditors or have a debt management company, like PayPlan, arrange for you. It lets you enjoy one manageable monthly repayment but is only an informal agreement, so creditors can still chase you for payment and even apply fees and charges. However, it is a good option for many looking to get their finances back on track. The solution lasts until all debts are repaid, so you should be debt free once it is finished. We have more information available about this solution on the site.
Individual Voluntary Arrangement (IVA)
This is an insolvency solution that could see you debt free in just five years and a significant portion of your debt could be written off. A debt management company such as PayPlan can only arrange this type of debt solution for you, which offers a single monthly repayment arrangement at a cost that you can manage and that takes into account your personal financial situation. There is further information available on the PayPlan site about IVAs, to find out more.
Armed with this new knowledge, you can start to better consider whether a debt consolidation loan is for you. But first, speak to a member of our team here at PayPlan, who can help with your decision and perhaps point you towards another solution that can help you get back on track with less risk.