Debt consolidation loans

Struggling with multiple credit repayments? A debt consolidation loan could help you simplify your payments, understand your debt better, and even reduce the interest you pay. But it’s not suitable for everyone, and there’s lots to consider before you act.

Here we look at what debt consolidation is, how it works, and what your options may be.

What is debt consolidation?

Debt consolidation is when you move some or all of your existing debt from multiple accounts (such as credit cards and loans) to just one account. To do this you’d pay off – and potentially close – your old accounts with credit from the new one. Your debt won’t disappear, but it will all be in one place.

How can I get a loan for consolidating debt?

As with any type of credit, you’ll need to apply for the loan and meet the lender’s requirements to get it. They’ll use information from your credit report, application form, and their own records to decide whether to lend to you, and at what rate.

If you have a low credit score, you may struggle to get a good rate – or even to get approved at all. Luckily, there are several steps you may be able to take to improve your score. It’s worth looking at your free Experian Credit Score to get an idea of how lenders may see you.

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It’s also helpful to compare loans with us to find an offer that’s right for you. It’s free and won’t affect your score. Plus, you can see your eligibility for debt consolidation loans, helping you understand your chances of approval before you apply.

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What can debt consolidation loans be used for?

You can use a debt consolidation loan to pay off some or all of your existing debts. For example, if you have credit card debt, personal loan debt, an overdraft or owe money on a store card, you could take out a debt consolidation loan to pay these off. You’d then just have the debt consolidation loan to pay off rather than multiple debts.

How do debt consolidation loans work?

If you’re thinking of applying for a debt consolidation loan, first work out how much you’ll need to borrow to pay off your existing borrowing such as any loans, credit card or overdraft debt you have. Once you’ve worked out how much you’ll need, you can apply for a loan for that amount.

If you’re successful in getting the loan, you then need to use this money to pay off your debts. While you won’t have reduced the amount of borrowing you have, at least your debt will now all be in one place and hopefully easier to manage.

Once you’ve paid off your existing debt, you then need to pay back the debt consolidation loan. It’s important you make your debt consolidation loan repayments on time and in full each month. You may want to set up a Direct Debit from your bank account to the loan provider to make sure you don’t accidentally miss or are late with your monthly repayments.

Debt consolidation loans – what to be aware of

  • Total cost of the loan. Even if the new loan has a lower rate than your existing credit accounts, the amount of interest you pay overall may be more if you have the loan for a much longer time
  • Set-up fee. You may be charged a percentage of the amount you’re borrowing to set up the loan
  • Impact on your credit score. For example, applying for a loan and closing old accounts can have a negative impact on your score

Can I consolidate my debt if I have bad credit?

Even if you have a low credit score, you may be able to get a debt consolidation loan. Secured loans are usually easier to get approved for than personal loans – this is because they use an asset, such as your house or car, as collateral to reduce risk for the lender. However, you may lose the asset if you don’t keep up with your repayments, so a secured loan is not to be taken out lightly.

Here’s an example of how a debt consolidation loan could look over a 3-year period:

  • Amount borrowed (over 3 years): £6,000
  • Representative APR rate: 6.1%
  • Annual interest rate: 6.1%
  • Monthly instalments: £182.36
  • Total charge for credit: £564.86

Total to repay: £6,564.86

Advantages and disadvantages of debt consolidation loans

Consolidating your debt with a loan can have several benefits:

  • Simpler budgeting. Instead of wading through various statements and juggling multiple payments, you’ll make one set monthly payment on the same date each month
  • A clearer view of your debt. Having all your debt in one place can make it easier to see how much you owe, how quickly you’re paying it off, and how much interest you’re being charged
  • Potentially lower rates. You may be able to reduce the amount of interest you’re paying by consolidating your debt under one lower interest loan

But there can also be some disadvantages:

  • If you don’t make your repayments in full and on time each month this could damage your credit score
  • You may find your existing lenders charge you a fee if you end your credit arrangement with them early
  • If you have a debt consolidation loan that is a secured loan, you could lose the asset this is secured against (typically your home or car) if you don’t keep up the repayments on your loan

What are my alternatives to a debt consolidation loan?

Balance transfer credit cards

If the debt you want to consolidate is on credit cards, you could move it to a 0% balance transfer card. As well as simplifying your payments, you’ll benefit from paying no interest for a set promotional period.

Some things to be aware of first:

  • You may be charged an initial balance transfer fee
  • You’ll need to make at least the minimum monthly payment – on time and in full – to keep the promotional rate
  • Once the promotional period ends, you’ll usually be put on the company’s standard rate. It’s best if you can pay off the card before this to avoid paying interest
  • Closing your old credit cards may affect your credit score.

Negotiating directly with your lenders

Another alternative — and one that many people consider as their first step — is to contact your lenders directly to explain that you’re struggling to pay them, and to discuss your options. It’s best to do this as soon as possible, rather than waiting to miss a payment or default on your account.

Companies can find it difficult to recover money from someone once they default, so they may be willing to accept a reduced payment or waive penalty fees. It’s worth noting that reduced payments will be marked on your report and will likely lower your credit score – plus, it’ll take you longer to pay off your debt.

Speaking to debt charities

If you’re struggling with repayments, you may be approached by companies promising to help you wipe out your debt. Be cautious. They may charge you hefty fees, and it’s possible to end up with even more debt and/or a damaged credit report.

Getting support and debt consolidation advice from a reputable, non-profit organisation is usually a much safer option. Examples are StepChange and National Debt Line. These charities can advise you on ways to deal with debt, such as a debt management plan or an Individual Voluntary Arrangement, both of which will probably have a negative impact on your report and score.

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