Debt Consolidation

Help with Debt Consolidation Loan – UK

A debt consolidation loan is one way of combining multiple debts into a single monthly payment. Consolidating debt helps some people pay off credit cards, store cards and personal loans in a more manageable way.

Debt consolidation falls under debt refinancing. Refinancing involves taking out new credit to cover older debts. There’s no debt forgiveness – you’re paying back your debt in full and it might actually cost you extra.

The decision to take out a debt consolidation loan isn’t one that should be taken lightly. It can affect your finances for years to come.

That’s why we strongly recommend you speak to a debt advisor to discuss alternatives and understand all the risks involved in the process.

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What is debt consolidation and why is it helpful?

Debt consolidation is the act of obtaining new credit – in the form of a debt consolidation loan – to pay off any existing loans you owe.

Taking out a debt consolidation loan may allow you to combine many debts into a single larger monthly payment but you will still be required to pay your debt in full.

In some cases, debt consolidation makes it convenient for borrowers to keep up with their repayment schedule. They only have to make one payment instead of going through the hassle of tracking multiple debts and coordinating with many lenders every month.

Some are able to find loan providers who offer lower interest rates. This may reduce the overall monthly amount they were initially paying towards their debt.

That doesn’t mean debt consolidation is helpful for everyone. Since it involves borrowing a larger sum of money to cover older debts, there are risks involved.

Debt consolidation loans can be expensive for some in the long run. Taking out more credit is a decision you should make with careful consideration, especially since it can worsen your financial situation.

At Money Advisor, we offer a professional, impartial review of your financial circumstances. Our experts can walk you through your options and help you decide whether debt consolidation is for you.

Does a debt consolidation loan really work?

In debt consolidation, the borrower relies on other forms of financing to pay off their existing debt and liabilities. By consolidating debt, some borrowers are able to keep better track of their finances and pay back their full debt on time.

People who need help with debt consolidation can apply for loans through many channels. Some people apply through their bank, others can consolidate debt with the help of a credit union or their credit card company. Others turn to debt consolidation service companies and lenders.

Note that debt consolidation loans do not help you write off the debt. They only transfer your loan to another lender or convert it into another form of loan. You will still have to pay it back in full, possibly with interest and all other charges.

If you need financial help with your debt problem or actual debt relief, you should look into solutions aimed at debt settlement. Debt settlement is aimed at reducing your overall financial stress instead of limiting the number of your creditors.

Debt settlement or management solutions usually involve renegotiating your existing debt with lenders, resulting in you paying lesser than you initially committed. That’s why it is vital to go over your options with a debt expert before making a decision.

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Debt consolidation loans: How do they work?

In situations consolidating debt works, applying for a loan can help people pay off many debtors. Afterwards, they can focus on repaying their single debt consolidation loan.

Basically, borrowers who consolidate debt are taking out a fixed amount in a lump sum (called a debt consolidation loan) to repay their existing lenders – and by the end of it, they have only one lender and a single monthly payment.

Add up your outstanding debts by checking the balance for each and if any charges apply, get an accurate figure of what you owe, and what you need to repay over the terms of your new loan.

Here’s an example of a debt consolidation loan obtained over a term of 4 years:

  • The amount borrowed (over 4 years) = £9000
  • Representative APR rate = 6.3%
  • Annual interest rate = 6.3%
  • Monthly instalments = £211.88
  • The total charge for credit = £1170.33
  • Total to repay = £10170.33

Two of the most common consolidation methods available to those who need debt help in the UK include:

0% or low-interest balance transfer card

Transfer all your debt to a card and then pay the balance in the form of a single debt during the promotional period

Fixed-rate debt consolidation loan

Apply for a debt consolidation loan and use it to repay your existing loan. Then, follow up on your debt consolidation loan by paying monthly instalments over a fixed period of time.

What are the different types of debt consolidation loans?

A debt consolidation loan can either be a secured loan or an unsecured loan. Let’s look at these two types of loans in detail:

What is a secured debt consolidation loan?

A secured debt consolidation loan is backed by a valuable collateral asset like your home, car or property. It’s sometimes called a homeowners loan in the UK

The collateral acts as a security for the lender. This means that if you’re unable to pay back your debt, the lender can confiscate your asset and sell it to recover its loss.

What is an unsecured debt consolidation loan?

You do not have to list your assets as collateral to apply for an unsecured debt consolidation loan. You can only take out unsecured personal loans worth £25,000 or less to help with debt problems.

What is better: secured or unsecured loan?

A secured loan is generally easier to get since there is less risk to the creditor. Lenders are more likely to consider you for a secured loan if you’ve got a poor credit history or are trying to rebuild your record.

Secured debt consolidation loans have lower interest rates and higher borrowing limits. Your creditor might consider your financial history before approving your loan grant.

Unsecured debt consolidation loans present a higher risk to the creditors. That’s why it is harder to qualify for them.

Unsecured loans also tend to have higher interest rates and maybe the more expensive option in the long run. However, unsecured debt consolidation loans may work for those who need to cover the smaller debt.

What can I use a debt consolidation loan for?

You can take out a debt consolidation loan to repay different types of debts. These include:

  • Personal loans
  • Credit cards
  • Payday loans
  • Store cards
  • Overdrafts
  • Medical bills

You could write Off Your Unaffordable Debt

Am I eligible for a debt consolidation loan?

You can apply for a debt consolidation loan if you meet these conditions:

  • You have a stable job/ a steady source of income and can manage repayments on time
  • You have not consolidated debt in the past
  • You have a good credit rating – this can help you get lower interest rates
  • You have the financial capacity to cope with repayments if there’s a sudden change in your circumstances e-g if you fall sick or if the interest rates increase

It’s worth remembering that the decision to grant you a debt consolidation loan is entirely your lender’s. Most lenders prefer providing loans on a case-by-case basis.

Make sure you speak to a debt help expert before deciding to consolidate debt. You might be able to find other more suitable solutions to your debt problem.

Debt consolidation and credit scores

Credit Rating

Does debt consolidation help or hurt your credit?

If a debt consolidation loan works for you, it may help with your credit score in the long run. This depends entirely on whether you are able to keep your repayments up to date. If you lag on your payments and are unable to keep up, the missed payments will be added to your credit history.

Your credit score might dip right after you apply for a debt consolidation loan. Your credit is checked during debt consolidation – and that can lower your credit score. Refinancing many debts into a single loan might also affect your credit utilisation ratio and lower your rating.

Signing up for a debt consolidation loan will also affect your credit report – this is called ‘credit search’. Also like most solutions, debt consolidation loans signal to creditors that you have struggled with previous repayments.

Taking out many loans over a shorter span of time might also result in lenders being more cautious. They might assume that you are overly dependent on credit and that can also cause difficulties accessing credit.

Debt consolidation loans can have long-term impacts on your financial life, not just your credit report. That is why it is crucial that you seek independent debt help to check if there are any alternatives that suit your situation better and can help with debt without ruining credit.

Bad Credit Debt Consolidation Help

How can I consolidate my debt with bad credit?

The lender decides whether or not to issue you a debt consolidation loan. They may go over your credit history to check if you can manage to make repayments. Generally, the higher your credit rating, the more likely it is that a lender will be willing to issue credit.

If you need help getting out of debt with bad credit, consolidating loans may not be a good idea. Poor credit (for instance missed payments, defaults, court judgements or past insolvency) can result in exorbitantly expensive consolidation loan offers e-g the lender might charge you a higher interest rate, pushing up the overall cost of debt.

Property owners might have the option of securing their property against the loan to get lower interest rates but that’s a major decision that can have major consequences. Homeowners risk losing their property if they default.

Debt consolidation in the UK: Pros and Cons

Like all debt solutions, debt consolidation has its own advantages and disadvantages. Debt consolidation is specific to your personal needs and circumstances.

Before deciding to consolidate debt, it is vital to consider both the merits and the drawbacks.

You can make an informed choice by getting help from a debt expert.

Debt experts hear out people who need help with debt solutions and provide them with all the resources they need to decide what works best in their situation.

Benefits of debt consolidation
  • Reduction of overall monthly payments
  • All your debt in one place – single payment with only one interest rate to keep track of
  • Regular and easier monthly payment plans to just one lender
  • Debt consolidation is an informal solution in the UK so it does not have to be recorded on the public insolvency register
  • Applying for a debt consolidation loan could buy you more time to repay your loan.
  • If you haven’t missed any payments, all your loans would be repaid by the end of the consolidation term – this means you could start afresh.

What are the risks of debt consolidation?

  • It May take longer to pay off completely with lower monthly payment schedules
  • No room for negotiation – by consolidating your debt, you’re paying back your loans in full.
  • Debt consolidation is different from debt forgiveness, management and settlement solutions which allow you to reduce your existing debt.
  • Interest rates are not frozen
  • Your lender could take action against you if you’re unable to make repayments
  • Debt consolidation might not be possible if you’ve got a poor credit score and loan providers to feel you’re not earning enough income to make repayments
  • Since consolidating debt is a long-term solution, you may end up paying back more than if you’d handled all your loans individually
  • Applying for a secured debt consolidation loan could put your property at risk.

How to consolidate your debt?

Step 1: Get debt help

The first step in consolidating debt is to understand whether this refinancing option is the best to suit your circumstances.  Speaking to an expert can help you evaluate your options and pick the right one

Step 2: Pick between secured or unsecured debt

If you need to borrow over £25,000 you may need to choose a secured loan, otherwise, consider an unsecured option.

Step 3: Decide how long you’d pay

Try to avoid extending your borrowing for any longer than you need, it will cost more and increasing payment plan lengths can have a negative effect on mental health and your ability to pay back over longer periods.

You could write Off Your Unaffordable Debt

Step 4: Go for the lowest interest rate

Rates differ depending on how much you need to borrow and for how long so this step is important.

Is taking out a debt consolidation loan a good idea?

Debt consolidation is not a quick fix for all debt issues. In some cases, it works by empowering people to take control of their financial situation. In other situations, applying for a debt consolidation loan can actually make the debt problem worse.

Generally, debt consolidation may work for you if you need to repay multiple debts, have a consistent income and can afford repayments. Taking out a debt consolidation loan might be a good idea if:

  • Your savings are not consumed by fees and additional charges
  • You can afford to repay a fixed portion of your debt every month
  • You plan on reducing spending
  • You’re paying less interest than you were paying before and the total amount payable is less (*it can be more if you’re repaying your consolidated loans over long duration)

Debt consolidation is a bad idea if:

  • You cannot afford to make repayments
  • You have a bad credit history
  • Your loan does not cover all your debts
  • You end up paying more than before (*because your monthly payment is high/ your agreement lasting for a long time)
  • You need a proper debt management strategy instead of another loan.

 

Debt Consolidation Loan Alternatives

Taking out a debt consolidation loan is not an option for everyone. It can be more expensive compared to other debt solutions.

Consolidating debt also involves borrowing again and that’s not an appealing prospect for anyone already struggling with debt problems. Also, if you have poor credit history, consolidating debt can become somewhat of a challenge.

If debt consolidation isn’t working for you, there’s a fair chance another debt solution will. There are plenty of other options available to borrowers who are struggling with debt payment. It’s vital to consider all your options before choosing one.

Here are some alternatives to debt consolidation loans:

Your Savings

If you have any savings, it’s better to use them to repay some of your loans instead of taking out a debt consolidation loan.

0% Money Transfers

Money transfers work by shifting the balance from a credit card into your bank account. You may have to pay a small transfer fee (usually 4%) but you will have a fixed period to pay off the balance interest fee.

Individual Voluntary Arrangements (IVAs)

Formal insolvency agreements arranged by licensed insolvency practitioners. Individual voluntary arrangements work by combining many debts into a single affordable monthly payment that you have to make for a fixed duration (usually 5 years).

After an IVA term ends, the rest of the debt is written off. Some borrowers can write off up to 90% of their debt through IVAs.

Debt Management Plans

Debt management plans are agreements between borrowers and lenders on how any outstanding debts should be repaid. DMPs are usually set up by third parties.

Debt Relief Order

Debt relief orders are a formal insolvency option for borrowers with low levels of debt and minimal assets.

Peer to Peer Lending:

Peer to peer lending platforms is online spaces that connect borrowers in need with willing lenders. The rates depend on your credit ratings and how much you want to borrow

Get help with debt consolidation

Applying for a debt consolidation loan is a major decision. It can have long-lasting consequences for you. That is why you should get debt help from an expert before making up your mind.

At Money Advisor, we have a panel of debt experts who offer guidance and resources on the different debt solutions available to borrowers across UK. If you need help with debt consolidation or are facing other financial difficulties,  get in touch with us.

FAQ

Need more info? Here are a few of our most frequently asked questions on this topic. If you don’t see the answer you’re looking for here, give us a ring – we’d love to help.

Can I combine all my debt into one payment?

You can combine all your debts into a single loan through debt consolidation. It involves taking out a debt consolidation loan to cover your existing debts instead of making many separate payments to multiple lenders. You then repay your consolidation loan by making one monthly payment to your loan provider.

How much do I need to borrow?

You should get just enough to cover your existing debts. With a debt consolidation loan, you should never borrow more money than needed since that could increase your repayment costs and push up your overall debt.

Do I have to repay all my debts with my debt consolidation loan?

You don’t have to consolidate all your debts. You can choose which debts you wish to consolidate.

For example, if you have a really good interest rate on one of your debts, you can still choose not to consolidate it and pay it separately.

But keep in mind one of the main benefits of debt consolidation is that you only owe money to one creditor instead of many.

Does debt consolidation hurt or ruin your credit?

Taking out a debt consolidation loan will hurt your credit initially. There could be a credit check and your credit utilisation ratio would also dip, resulting in a lower credit score.

Assuming you do not default and are able to make all your payments on time, your credit score might improve gradually.

Is consolidation the best way to deal with debt?

Consolidation does not help with all types of debt problems. Whether it is the best way to deal with debt depends a great deal on your circumstances and level of debt.

Consolidation may not be the best debt solution for everyone. In fact, if you take out a debt consolidation loan, you might end up paying a higher total interest over a longer period of time.

Can I get a consolidation loan with bad credit?

If you have a low credit rating, it might be harder to find a lender willing to let you borrow. Even if you get an offer you should act cautiously – it’s very likely that your loan offer comes with high-interest rates and hefty penalties.

What details do I need to get a debt consolidation loan offer?

Some of the details you may need to share with your loan provider include:
● All the addresses you’ve lived at since the last three years
● Your employer’s details including their contact number and address
● Your email address
● Detailed information about your monthly income and outgoings
● Your bank or building society account details

Why is debt consolidation a bad idea?

Consolidating debt, especially with a poor credit rating, is not the best solution for most borrowers. Debt consolidation loans are risky and can be difficult to get. They could also add to financial distress instead of reducing it.

How much does a debt consolidation loan cost?

Interest charges can differ according to the size and duration of the loan.

Taking out a debt consolidation loan for a longer period of time might lower the interest rates – but you’ll be making payments for longer. Borrowers with bad credit scores are more likely to get offers with steeper rates of interest.

How to get help with debt consolidation?

If you’re in the UK and need help with debt problems, reach out to our debt experts. Money Advisor is committed to offering help, resources and debt solutions to everyone struggling with debt.

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