An individual takes many small types of credit over his working years. Each loan requires you to make monthly repayments with interest getting charged on it. They just go on mounting and debt management becomes a struggle in itself. Not only that, your mind is racing in ten different directions as you try to save money after paying off the creditors. However, there’s an easy way out. If you’ve got multiple debts, you should consider applying for debt consolidation loans.
What Are Debt Consolidation Loans?
This is a special type of loan that allows you to clear your existing debts in one shot. Basically, loan consolidation is grouping all your debts. Debt consolidation loans allow you to borrow an amount high enough to pay existing debts in full. Later, you’ll have just one loan and one monthly payment to manage. This type of debt management reduces pressure from creditors as well as saves a substantial amount of money. Remember that lenders give out debt consolidation loans for a longer period of time and at low interest rates, so you may not be totally free from debt for a few years.
What Are The Types Of Debt Consolidation Loans?
There are two main types of debt consolidation loans available in the UK lending market.
Unsecured Debt Consolidation Loans:
These are unsecured loans that can be used to clear any credit you’ve borrowed and are paying interest on. People mostly use unsecured debt consolidation loans to repay debts like payday loans and short-term loans. As they aren’t secured with collateral like your home or any other asset, interest payments could be quite high.
Secured Debt Consolidation Loans:
In contrast to the above, secured debt consolidation loans are given against the security of an asset like your home. A lender will assess how much outstanding debt the applicant has and the risks they pose. If you owe a lot or have a poor credit history, you may only be considered for secured loans. This ensures that the lender doesn’t lose their money. You should get free debt advice consultation before going for this product as you may lose your home for small loans you’ve taken.
Low Interest Debt Consolidation Loans:
Look out for low-interest loans that help you consolidate debts. If you’re currently paying high interest rates, debt consolidation loans that cost less save you a lot of pounds in the long run.
How Do Debt Consolidation Loans For Bad Credit Work?
As lenders don’t emphasize on a credit check for such types of loans, most borrowers are those with bad credit. Debt consolidation loans help people undo the ill-effects of poor credit management and gain greater control over their debts. As the borrower always knows how much he owes, scope is there for improvement in their credit score. But, this is a slow and steady process that works only if the borrower consistently makes repayments.
How Do Debt Consolidation Loans Affect Credit Scores?
People firstly think of this option as they have a bad credit score. And if you fail to keep with debt consolidation repayments, your score will only fall further. Also, applying for many such loans within a short timeframe shows lenders that you’re overly reliant on credit. This would only make it more tough to access credit in future.
When Should I Go For A Debt Consolidation Loan?
You should go for a debt consolidation loan only if:
- Your savings aren’t being wiped out by fees and charges
- You can afford to pay it back
- You’re using it to cut down on spending and bring your finances back on track
- You end with lesser total amount and interest payable than before
When Is Debt Consolidation A Bad Idea?
Consolidating your debts with a fresh loan makes no sense when:
- You can’t afford the debt consolidation loan repayments
- It isn’t possible to clear all debts with this loan
- You pay more than before (due to higher monthly repayment or longer term agreement)
- What you need is debt help and not a new debt- a debt negotiator can talk to creditors and arrange a repayment plan
What Are The Benefits of Debt Consolidation Loans?
The benefits you can get with these loans are:
- Reduce your rate of interest:
Store cards, credit cards and personal loans carry very high rates of interest. Debt consolidation loans help consolidate all your debts at a very low interest.
- Reduction in monthly repayment:
Earlier, you had to pay both principal and interest every month on a wide number of loans. Now, you pay just one loan, so there’s a reduction in monthly repayment.
- Improvement in credit score:
Taking out a debt consolidation loan itself shows that you’re becoming mindful about your debts. If you pay back this loan in full consistently, there will surely be an improvement in your credit score.
- Deal with lesser number of creditors:
As you pay off all your creditors, you deal with just one lender henceforth.
What Are The Drawbacks of Debt Consolidation Loans?
Debt consolidation loans also have some drawbacks. These are:
- Further Reduction in Credit Rating:
If you fail to pay back debt consolidation loans on time, your credit rating may further deteriorate.
- Secured Against Your Home:
With a secured loan, you risk losing your home.
- Temptation to Spend on Credit Cards:
You may be again tempted to buy that lovely dress in the shop window with your credit card.
- Rise in Interest Rates:
No lender would guarantee that interest rates for their debt consolidation loan won’t rise. This increases the time it takes to clear this debt.
- Affordability of Repayments:
You should be able to afford the repayments.
What Fees & Charges Apply?
Beware of paying unnecessary fees and charges to lenders.
- Read the fine print and understand fees before you sign up.
- Early repayment charges on existing loans may eat up your savings.
- Avoid paying a fee to a company to arrange a loan for you.
Life always has a set of different alternatives available. Instead of debt consolidation loans, you can think of:
- Balance transfer card
- Debt Relief Order