Debt Consolidation Loans

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A debt consolidation loan is a secured or unsecured loan taken out to pay off other smaller debts.  This makes it easier to manage debts as you are only paying one payment each month to one company, instead of several, often to different companies.  It can also reduce monthly payments, especially if the debt is spread over a longer period of time.

A debt consolidation loan may be a debt solution for you if your debt problems are not severe - for example if cutting the interest rates you are paying is all you need to do. This could be the case if your income has fallen or you just want to reduce your outgoings each month.

Do bear in mind that you are only likely to be eligible for a debt consolidation loan if you have a good credit rating, or if you are a home owner and have a significant amount of equity in your home.

We would generally advise you to not consider debt consolidation if any of the following apply to you:

  • You are going to use the loan to free up store or credit cards that you need to use again
  • You've had a consolidation loan before and have debt still owing from it

If either of the above are true, or if you have consolidated loans several times before it is likely you would be better off looking at a Debt Management Plan or an IVA

Think carefully before securing other debts against you home.  Your home may be repossessed if you do not keep up repayments on a mortgage or any other debts secured against it.

The Advantages of a Debt Consolidation Loan

  • Make just one payment each month to one company
  • Enjoy a lower interest rate in many cases
  • Know exactly what you owe and over what term
  • Know exactly when you'll be debt free

Things to bear in mind with a Debt Consolidation Loan

  • If you take out a secured loan to consolidate your debts, you may end up paying the debt back over a longer period of time therefore potenially increasing the lifetime of the original debt
  • Usually less flexible e.g. a credit cards let borrowers pay as little as a minimum payment each month, to paying off a balance in full
  • If a secured loan is taken out to consolidate debts, your home may be at risk if you do not keep up payments on the loan
  • Requires self-discipline because it ‘frees up' credit cards, overdrafts and other credit – if you run up fresh debts, you'll be worse off than you were when you consolidated your debts, as you'll have to pay off your new debts and your consolidation loan
  • Make sure you get a competitive deal on your consolidation loan by shopping around or using an independent financial adviser who can give advice on a large range of products and lenders.  Avoid loan sharks (someone who lends money without a licence)

Useful Links

>>> Debt Management Plans
>>> IVAs
>>> Bankruptcy
>>> Payday Loans
>>> Useful Debt Tools, Information & Advice
Debt Questions & Answers
>>> Debt Calculator Tool


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