A debt consolidation loan is a loan that you use to pay off existing debts, such as loans, credit cards or overdrafts. For instance, if you’re only making the minimum monthly payment on your credit card, you may have debt building up on it because of the amount of interest being charged. If you’re worried about this spiralling, you could use a debt consolidation loan to clear your credit card debt and pay it off in more manageable monthly instalments.
How does a debt consolidation loan work?
If you’re thinking about checking your eligibility for a debt consolidation loan, work out how much you need to pay off the debts you want to clear. You can pay off more than one debt with a debt consolidation loan, so instead of juggling multiple repayment dates and amounts, you can have just one monthly repayment date to remember.
With a debt consolidation loan, it is usually your responsibility to pay off your existing debts once you receive your loan. It’s essential you do this as soon as possible to avoid using the money for something else. In some cases, the lender will arrange the clearing of your debts for you. Make sure to check your lender’s policy so you know exactly what’s expected.
Once you’ve paid off the debts you want to clear, you just pay off your debt consolidation loan in fixed monthly instalments until the end of your loan term.
If you are thinking of consolidating existing borrowing you should be aware that you may be extending the term of the debt and increasing the total amount you repay.
What debts can I pay off with a debt consolidation loan?
You can pay off most kinds of debts with a debt consolidation loan. These include:
- Credit cards
- Store cards
Top tip: If you’re thinking about paying off a loan, make sure to check if there are any early repayment fees.
Which debts you decide to pay off is really up to you. You may want to prioritise clearing the debts with the highest APRs, or you may want to pay off as many as possible with how much you’re eligible to borrow.
What are the benefits of a debt consolidation loan?
Consolidating your debts can have its benefits. Not only could you save money, but you could also stop your debts from spiralling.
- You could save money by switching to a debt consolidation loan with a lower APR
If its been some time since you last took out a loan or credit product, you may now be eligible for a consolidation loan with a lower APR. This means you could save money by switching to a cheaper product, reducing your monthly repayments.
- You could reduce your monthly repayments by spreading them out over a longer term
If you think you need a bit more breathing space with your current monthly repayments, you may be able to reduce them by paying off your debts with a loan that has a longer term. Although you’ll end up paying more back overall, you could avoid a missed payment being recorded on your credit file.
- You could prevent other debts from building up
As previously mentioned, if your credit card bills or overdraft amount is starting to spiral, you could clear them using a debt consolidation loan. You’ll then be able to pay off what you owe in fixed monthly instalments without the worry of your debt building up further.
- You can make it easier to manage your money by rolling multiple repayment dates into one
Tired of juggling multiple repayment dates? With a debt consolidation loan, you can pay off more than one debt and have just one monthly repayment date of your choice to remember.
What do I need to keep in mind with a debt consolidation loan?
As with all credit products, there are some important things to bear in mind before you proceed.
- If you’re extending the term of your loan, you may end up paying back more overall because of the interest.
- Don’t borrow more than you need. Although tempting, it will mean higher monthly repayments which could put a squeeze on your finances.
- Think carefully before taking on more debt and only take out finance you can afford to pay back.
Can I take out a secured debt consolidation loan?
Yes, if you’re a homeowner with a mortgage you can check your eligibility for a secured debt consolidation loan. The main difference with a secured debt consolidation loan is that unlike a personal debt consolidation loan, it’s secured against your property.
Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
Benefits of a secured debt consolidation loan
- You can usually borrow larger amounts
- You may be eligible for a lower APR
- There are longer loan terms available
- You can get advice on which debts to pay off
What to keep in mind with a secured debt consolidation loan
- Just like with your mortgage, the lender could repossess your property if you can’t pay back your loan
In short, a debt consolidation loan can be a great way to streamline your finances and make it easier to manage your money. Just make sure it’s the right option for you before you proceed.
Want to find out if you’re eligible? Check your eligibility for a debt consolidation loan now in just a few clicks.
If you’re not eligible for a debt consolidation loan and you’re worried about your debts, there is help out there. myfreedom is our free to use platform where you can find DebtSense – a debt solution specialist. You can take their free online, confidential quiz to find out your options. Your results are just for you won’t be shared with anyone unless you choose to do so.
If that’s not for you, you can also take our quick myfreedom coaching module on tackling your debts. It only takes a few minutes and will give you a plan of action for reducing what you owe.