What is debt consolidation?
Debt consolidation involves taking out a new loan to pay off your existing debts and then repaying the new consolidated loan in one monthly amount.
For people with lots of different debts, consolidation can be a simple way to make repayments more manageable, without the negative credit implications that debt solutions can bring. However, a consolidated loan can come with its own drawbacks, hidden costs, and credit implications if repayments aren’t made on time.
Is debt consolidation right for you?
Consolidating your debts may be right for you if you have multiple outstanding debts and you’re struggling to keep on top of your monthly repayments. By consolidating your debts with a new loan, you’ll have just one single monthly repayment which could be easier to manage.
It is worth considering that consolidation loans can often come with additional costs and fees so although a cheaper monthly repayment can make savings in the short term, you could end up repaying more in the long term.
What debts does a Debt Consolidation Loan cover?
You can use a Debt Consolidation Loan to pay off debts like:
- Unsecured personal loans
- Credit cards
- Store cards
- Payday loans
- Buy now, pay later debts
Debt Consolidation Pros & Cons
Debt Consolidation Pros
- Easier, more manageable monthly repayments
- No negative impact on your credit score (providing repayments are made on time)
- Good for those with a steady income and the ability to make monthly payments
Debt Consolidation Cons
- Can work out more expensive when factoring in fees and charges
- Missed repayments will have consequences on your credit score
- Interest rates can be high for people with existing poor credit
Am I eligible for a debt consolidation loan?
To be considered for a consolidation loan you must have:
- No prior consolidated debt
- A steady income
- A good credit score to receive the best interest rates
- Be able to demonstrate financial stability to make monthly payments
Are you ready to find your debt solution?
- Affordable monthly payment
- Stop creditor contact
- Stop interest and charges
Understanding debt consolidation benefits
0% interest loans – These are often only available to people with strong credit scores. For those with existing debts or poor credit history, the interest rates can often be higher than what was being paid across your previous debts.
Reduced interest rates – The lower rates on consolidated loans are often stretched over a longer period, meaning that you end up paying more in the long run.
Allows breathing space from debts – This breathing space only comes when there are no significant additional fees and payments will be consistently met in the long run.
Lower monthly payments – Having a safe and secure income is vital given the extended repayment period. If your loan is secured against your house and you find yourself unable to keep up with the repayments, your home could be at risk.
When considering a consolidation loan, it’s important to understand what your aims are. If you have a stable income and can comfortably afford repayments this may be an option. However, if you are struggling with existing repayments, have poor credit, or your current or future income is unstable, a consolidation loan could make your current debts worse.
Further, the fees and charges that often accompany a debt consolidation loan can leave you no better than before you started.
“It’s made a big difference to me and how I live.“— Helen, Aberdeenshire
Read Helen’s story…
Alternatives to a Debt Consolidation Loan
There are several debt management solutions that may work better for you than a Debt Consolidation Loan. These all come with their own benefits and drawbacks so understanding your current and future financial situation is key.
Debt Management Plan
A Debt Management Plan is an informal agreement between you and your creditors to pay back your debts with one affordable monthly payment, without taking on more debt.
Debt Relief Order (DRO)
A DRO is an alternative to bankruptcy for people with debts of less than £30,000 (£20,000 in Northern Ireland) and less than £75 a month in disposable income.
Individual Voluntary Arrangement (IVA)
Make one affordable monthly payment over five or six years and then write-off any remaining debt.
Debt Arrangement Scheme
A government backed debt management scheme available to residents of Scotland which allows you to repay your debts through a debt payment programme.
For free and impartial money advice and guidance, visit MoneyHelper.
Still unsure or wish to know more?
That’s where our advisors come in, our expert advice team can help you find the debt plan that works for you. If you feel you may qualify for a Debt Consolidation Loan, give us a call and we will help you work it out.
At MoneyPlus we understand that every financial situation is different and approach every customer with the care and individuality that they deserve.
So, get in touch today and start living better with MoneyPlus Advice.