The Debt Consolidation Option
Debt consolidation loans are suited to those in employment but struggling with repayments, but is otherwise financially mature enough to know that further borrowing should only be used as a route to payback what’s already owed.
How A Debt Consolidation Loan Works
You apply to a lender for a loan to reorganise, or clear your debts. Generally you’d aim to pay off several higher interest debts with one lower interest loan. This means swapping some or all of your creditors for just one.
If you own your home, the lender will probably want to secure the loan on it. Having a loan on your home means that if you don’t repay the debt, the creditor has a claim on the proceeds if the property is sold.
Important: If you can’t pay a remortgage or secured loan taken out against your home, your lender may take action to repossess your home.
You should seek independent advice about whether this would be in your best interests.
A consolidation loan will only help if:-
- All the loan is used to pay some or all of your existing debts.
- The repayments on the new loan are no more than those you are already making towards your existing debts, and you can afford to make them.
Otherwise, the new loan will simply add to your debt burden and make your problems worse.
You will also need to look very carefully at how long the loan will take to repay, what interest you are going to have to pay compared with what you are currently charged; and what charges or penalties there are, for example for late payments.
Note: If you’re in a cycle of consolidating debts, soon you will not be able to borrow again and won’t be able to afford to pay what you owe. If you keep whacking debt on your mortgage – you’re soon going to be running the risk of repossession. In which case you need to seek debt advice.
Debt Consolidation Loan Advantages
You will be making one monthly payment on one loan rather than many payments to different creditors.
Your monthly payments may be lower, or at least should not be any higher.
You NOT damaging your credit rating by not missing payments on your existing loans.
Debt Consolidation Loan Considerations
You may have to pay fees for arranging the loan. Always ask for full written details of all fees.
Poor credit rating?
If you have a poor credit rating, you may not be able to get a loan or you may be offered poor terms, for example a high interest rate.
Risk of repossession
If the loan is secured on your house or other asset, then it could be taken from you if you do not keep up the payments.
Changing interest rate
Interest rates often change over the loan period, making it difficult to work out what the total cost of the loan will be – check if the interest rate is fixed or variable.
More expensive overall?
In the long run, the cost of could be greater as it’s is normally spread over a longer period and so total interest repaid can be more.
Not clearing all debts?
If you don’t clear all your existing borrowing, the new loan is likely to make your debt problems worse and make it more difficult for you to make all your payments.
How We Can Help
We do not offer loans. However we can assess your situation and advise on your suitability for a consolidation loan and for other options.