If you’re struggling with multiple debts, you may be able consolidate them into a single convenient and affordable payment. You can do that by taking out a debt consolidation loan. Debt consolidation loans have helped many UK-based borrowers deal with debt issues and regain control of their finances.
While debt consolidation loans work for some borrowers, they can be wildly expensive and time-consuming for others. Whether or not debt consolidation loans work for you depends on various factors such as your financial circumstances, your credit history and the total amount you owe.
Debt consolidation is a long-term debt solution; it can impact your financial health for years to come. That’s why you should not take this decision lightly. Read our in-depth guide to understand what debt consolidation is and how it works:
What is a Debt Consolidation Loan?
Debt consolidation loans allow borrowers to combine multiple small debts from different creditors into a single monthly payment, usually with more favorable terms such as a lower interest rate, lower monthly payments or both.
Taking out debt consolidation loans is a form of debt refinancing; borrowers usually take out a single loan to pay off many different existing debts like loans, overdrafts or credit card borrowing. This way, instead of making smaller payments to multiple lenders throughout the month, borrowers just have to make a single monthly repayment to one lender.
Debt consolidation sometimes makes it easier for borrowers to keep track of their debts, manage their finances and control their cashflows while making repayments. If you want to know whether debt consolidation is the best way to manage your debts, consult a professional debt advisor.
Which Debts Can Be Consolidated?
Any small debts that you can pay off early can be consolidated including:
How Debt Consolidation Loans Work?
Consolidating debt mostly involves taking out one big consolidated loan to repay multiple small debts. Borrowers who consolidate debt mostly reborrow a lump sum (also known as a debt consolidation loan) to repay their current debtors. That’s how they end up with only one lender and a single monthly payment.
Here are two of the most common methods to consolidate debt in the UK:
- 0% or Low-Interest Balance Transfer Card: Borrowers transfer all their debts to this card and then pay all the balance during the promotional period.
- Fixed-Rate Debt Consolidation Loan: Borrowers first apply for a debt consolidation loan and use it to clear their existing debts. The debt consolidation loan is then repaid in the form of monthly installments over a fixed term.
Types of Debt Consolidation Loans
There are primarily two types of debt consolidation loans; secured loans and unsecured loans. Let’s look at them in detail:
- Secured Loans:
A secured loan is a debt with which you have to attach a valuable asset (like your car or house) to act as a security for the loan. If you’re unable to repay a secured loan, your creditor can choose to seize your asset and sell it to recover the debt.
- Unsecured Loans:
An unsecured loan, as the name suggests, is a personal loan that does not require an asset to act as a security for the loan.
Advantages and Disadvantages of Debt Consolidation Loans
Are Debt Consolidation Loans a Good Idea?
Debt consolidation loans do not work for everyone. If you’re wondering whether debt consolidation is a good idea for you, we recommend that you seek the help of an experienced debt advisor.
Debt consolidation loans may not work for you if:
- You cannot afford the new loan payments
- You have a poor credit history
- Your loan does not clear all your debts
- You end up paying more than before (because either monthly repayment is high or your agreement lasts for long duration)
- You need a proper debt management strategy instead of another loan.
Generally, debt consolidation loans may work for you if:
- Your savings are not wiped out by fees, additional charges, and penalties
- You can afford to repay a fixed portion of your total debt every month
- You plan on cutting down on 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 a longer duration)
Debt Consolidation Loans Alternatives
Not everyone can avail debt consolidation loans. For some borrowers, debt consolidation can be more expensive compared to other debt solutions. For others, borrowing on top of existing debts may not be such an appealing prospect, to begin with. Also, you may not be able to take out a debt consolidation if you have a poor credit history.
Like all other debt solutions, debt consolidation loans may work for some borrowers but don’t work for others. That’s why it is really important to take stock of your options before you make up your mind.
Here are some alternatives to debt consolidation loans that you should also consider:
- Your Savings:
If you have any savings, it’s better to use them to repay some of your loan instead of taking out a debt consolidation loan.
- 0% Money Transfers:
Money transfers work by shifting 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.
- Peer to Peer Lending:
Peer to peer lending is gaining popularity in the UK. Peer to peer lending platforms are online spaces that connect borrowers in need with willing lenders. The rates depend on your credit ratings and how much you want to borrow.
4) Individual Voluntary Arrangements
A formal insolvency arrangement (IVA) set up by a licensed insolvency practitioner (IP). IVAs are a viable option for individuals with serious debt issues. Individual voluntary arrangements are agreements through which you can write off as much as 90% of your debt.
IVAs typically condense multiple debts into a single affordable and fixed 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.
IVAs are also a formal solution, meaning that once an IVA is in place, your creditors have to comply with it. So, if your creditors are pursuing or intimidating you for debt, an IVA can put an end to it. After an IVA is arranged, only IP would negotiate with your creditors on your behalf and you will be able to sever contact with them.
Wondering whether you qualify for an IVA? Money Advisor is one of UK’s leading debt help agencies that offers assistance and advise to borrowers struggling with debt issues. Our debt consultants can help you evaluate your options and decide if IVA is the right debt solution for you. Our experts will also help you set up an IVA and put you on the path to financial recovery.
- 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.
Get Free Debt Advice from Experts
Taking out a debt consolidation loan is a big decision. It can have long-lasting implications on your life. That’s why you should consult a debt advisor before taking out a debt consolidation loan. At Money Advisor, we have a team of friendly and professional debt experts who can help you figure out what works best in your situation. Get free debt advice!