What is debt consolidation?
When you use a debt consolidation service, you take out a new loan to repay your existing debts. You are then left with one monthly sum to pay.
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 a type of informal agreement that you reach with your creditors to repay your debts with one affordable monthly payment. You do this without taking on more debt.
Debt Relief Order (DRO)
Available to people with less than £75 per month in disposable income and debts lower than £30,000 (or £20,000 in Northern Ireland), a Debt Relief Order is an alternative to bankruptcy.
Individual Voluntary Arrangement (IVA)
IVAs are formal, legally binding agreements between you and your creditors to pay back your debts over a set period of time (5 or 6 years). You make an affordable monthly payment over this period, and any remaining debt is written off at the end of the IVA.
Debt Arrangement Scheme
Available to people living in Scotland, this government-backed debt management scheme allows you to pay back your debts through a debt payment programme.
Still unsure or wish to know more?
Looking for more debt consolidation advice and information? Our advisors are here to help.
At MoneyPlus, we understand that your financial situation is unique, and we will treat you with the care and individuality you deserve.
So, get in touch with our team today and start living better.