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What can I use a debt consolidation loan for?

A debt consolidation loan can be used to pay off multiple loans, credit cards, store cards or overdrafts so that each month you just make one single monthly repayment to a single lender.

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.

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What is debt consolidation?

So, what is a debt consolidation loan? A debt consolidation loan can be used to pay off multiple loans, credit cards, store cards or overdrafts so that each month you just make one single monthly repayment to a single lender. This simplifies the debt, keeping it all in one place and potentially making it easier to manage.

You could also use a debt consolidation loan to pay off just one credit product (e.g. a single personal loan or credit card) that has a higher APR. If you’ve been consistently making repayments for a while, your credit score may have improved since you first took out your current credit products. This means you might now be eligible for a better rate and able to reduce the amount of interest you’re paying by switching to a debt consolidation loan with a lower APR.

If you’re thinking of consolidating your loans, credit and store cards into one, you should know that it might mean extending the term (that’s the length in months) of your debt, as well as increasing the total amount you repay.

Why consider debt consolidation as a solution?

If you have multiple debts (loans, credit cards, overdraft, etc.) and are struggling to repay them all each month, then consolidating those debts into one payment could make managing your finances a little easier for you.

A debt consolidation loan groups all your different debts together. This could mean:

  • Monthly repayments are easier to manage
  • You spend less time sorting out all your different repayments
  • It’s simpler to budget
  • You may be able to reduce overall monthly repayments
  • You could save money by switching to a loan with a lower APR
  • You could reduce your monthly repayments by spreading them out over a longer term (although this may increase the amount of interest you pay back overall)
  • You could reduce the term of your debt and save money on interest

Like with most loans, if you don’t keep up with repayments throughout the term of your contract, then it can negatively affect your credit score. That being said, with just one monthly repayment to remember, you may find it easier to stay on top of your finances.

Regularly repaying a debt consolidation loan (on time) could help improve your credit score in time.  ​​​

What kinds of debts can be consolidated?

You can usually consolidate debts such as credit cards, store or retail card debts, overdrafts, medical bills, student loans as well as other unsecured personal loans. There are debts such as mortgages that cannot be covered by debt consolidation loans.

What are the limits on debt consolidation loans?

The limit will vary from lender to lender, as certain lenders will offer to consolidate more debt than others. The maximum you can consolidate will also depend on your personal circumstances.

The limit on debt consolidation loans will vary from lender to lender.

What to consider when checking your eligibility for a consolidation loan

Like with most loans, debt consolidation loans can be categorised into two different categories. These are secured and unsecured loans.

Secured debt consolidation loans are loans where the amount you borrow is secured against the value of an asset that you own, usually your home. This means that, by taking out the loan, you are acknowledging that if you miss the repayments, your home or asset may be at risk.

Unsecured debt consolidation loans, on the other hand, do not require an asset to be secured against.

When searching for a debt consolidation loan, don’t be tempted to borrow more than you need. Any amount you borrow will still need to be repaid. When checking your eligibility for a debt consolidation loan, it is worth keeping a few things in mind:

  • Although you’re reducing the number of debts to a single debt, you could be increasing the term of the loan.
  • You may benefit from lower monthly repayments – but the total amount repayable may be higher overall.
  • Be sure to compare the interest rate or APR (annual percentage rate) of your existing debts with the interest rates of the debt consolidation loan. This will help you ensure that you benefit from consolidating your debts.

Can a debt consolidation loan be secured?

Yes. A debt consolidation loan can be secured or unsecured. If the debt consolidation loan is secured, it is secured against an asset like your property. This added security lowers the risk to the lender and this means a secured loan may come with lower interest rates than an unsecured personal loan, giving you lower monthly payments.

That being said, secured loans are not without their risk. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

What is the risk of a debt consolidation loan?

The risks associated with debt consolidation loans are the same as with most other types of loans. If loan repayments are late or missed, then it can affect your credit score. Likewise, if the loan is secured and it is defaulted on, then your home or asset may be at risk.

Why might a debt consolidation loan be declined?

If you’ve been rejected for a debt consolidation loan, there are a number of reasons why this could have happened. A lender will use your credit report as well as their own lending criteria to make a decision on whether they will offer a loan. If you are not on the electoral register or if you have recently moved jobs or house, then these factors can affect a lender’s decision to decline a loan application.

Can I get independent advice about debt consolidation loans?

Yes. An independent organisation called the Money Helper offers free, impartial advice. Call 0800 011 3797 or visit Money Helper.

Looking for a loan?

Second charge mortgages from 5.1% APRC. Second charge mortgage representative example (if you choose to add fees to the loan). Assumed borrowing of £29,000 over 139 months, plus a broker fee of £2,850 and lender fee of £367.50 would result in monthly repayments of £406.28, the borrowing rate is 8.6%, the APRC is 11.3% (variable), total charge for credit would be £24,254.73 and the total amount payable would be £56,472.23. Freedom Finance is a leading credit broker and not a lender. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.