Are you juggling a number of loan repayments every month? Are your debts all due at different times? Has handling loans from different lenders become an administrative nightmare? If this sounds familiar, then a debt consolidation loan could be for you. Make sure that you make an educated decision about taking out a debt consolidation loan by considering the advantages and disadvantages that are outlined below.
What is a debt consolidation loan?
A consolidation loan is used to pay off a number of existing debts so that you are left with one single monthly repayment to one lender each month.
The advantages of consolidating your debt
Because a debt consolidation loan groups all your existing borrowing, the monthly repayments are easier to manage. The increased effectiveness of this new household budget will lower the chance of late repayment charges or unarranged overdraft charges.
Reduced overall repayments
A debt consolidation loan could even save you money each month if the interest rate is less than the combined total interest of the previous loans.
Improved credit rating
The simplicity of repaying a debt consolidation loan means that you are more likely to repay the debt on time every month. This will prove you to be a responsible borrower, which will have a positive effect on your credit score.
Reduced administration time
A debt consolidation loan is a singular monthly payment in the place of a number of previous smaller borrowings from a variety of lenders. The varying interest rates and terms associated with the previous lending can now be managed within a single monthly payment, which puts an end to monthly budget adjusting. With the administrative hassle removed, you can concentrate on improving your credit score, which will bring potential future borrowing, such as a mortgage, back into reach.
Increased overall interest repayment
A debt consolidation loan benefits from lower monthly interest rates due to the extended term over which it is paid, but this means that a higher interest total will be paid overall. Compare the interest rates on both the loans you are thinking of consolidating with the debt consolidation loan to check the affordability and suitability of this type of borrowing.
Temptation to borrow more than is needed
Don’t lose sight of the reason you are taking out a debt consolidation loan – to effectively manage existing debt. Try not to be tempted to borrow more than you actually need – it will still need to be repaid!
Can a debt consolidation loan be secured?
Yes, a debt consolidation loan can be secured against an asset such as your house by way of a first or second charge mortgage. This lowers the risk to the lender and thus can often come with lower interest rates than those found on a personal loan. Don’t forget however that your home is at risk should repayments not be made, so make sure you are able to afford the mortgage for the full duration of its term.
Can I seek independent advice about debt consolidation loans?
Yes. An independent organisation called the Money Advice Service has been set up by the government to offer free, impartial advice to those who are struggling with debts. The Money Advice Service can be contacted online via their website https://www.moneyadviceservice.org.uk or by telephone 0300 500 5000.