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Debt Consolidation Loan

A consolidation loan is credit taken out to pay off existing debts, putting them into one monthly commitment

A Debt Consolidation Loan can be a viable option for those who are struggling with numerous credit commitments and debt repayments. When you have multiple loans with different creditors it can be difficult to keep track of all of the different payments. A Debt Consolidation Loan can help you manage this by repaying all of your debts, and replacing them with one loan, leaving you with a single monthly payment to manage.

By restructuring your debt in this way, you can better organise your money. A single payment is far easier to manage and budget for, and dependent on the terms of the new loan, you may have a lower payment each month. Factors such as the total amount borrowed, the interest rate attached to the loan and the period over which it is to be repaid will all have an impact on the monthly payment and the total cost of credit.

Debt consolidation loans can be used for a number of different types of debt including:

  • Credit cards
  • Personal loans
  • Overdrafts
  • Store cards

A debt consolidation loan can provide peace of mind that the previous debts are settled in full. It is not uncommon for people struggling to manage multiple lines of credit to find that the minimum payments they are making towards debts such as credit cards may have only been paying monthly interest and not actually chipping away at the borrowed amount.

A debt consolidation loan can either be unsecured or secured on an asset, typically your home if you are a homeowner. 

A secured Debt Consolidation Loan

A secured debt consolidation loan is secured against an asset, typically your home. These may be referred to as a ‘homeowner loan’. However, loans can be secured against other assets like your car, for example. 

If you fail to make the payments on a secured debt, the lender can seize the assets that it is secured against in order to achieve repayment.  A secured loan benefits the creditor as there is an extra level of security (assurance they will ultimately be repaid). In return, the interest rates may be more favourable than an equivalent unsecured loan. This ‘security’ is often sought by Lenders for borrowers that have a poor credit history.

An Unsecured Debt Consolidation Loan

An unsecured debt consolidation loan does not have to be secured against an asset. People with particularly poor credit are less likely to qualify for an unsecured loan, or may be subject to high interest rates and limited to how much they can borrow

Although it is not secured against your assets, there are still risks involved with unsecured credit. If you fail to make payments on time, your credit score will be affected. Eventually, the lender may take legal action against you and, if granted permission by the courts, they can send bailiffs to collect on the debt, or (if you are a homeowner) secure the debt against your home by way of a Charging Order.

So, regardless of whether you opt for a secured or unsecured loan, only commit to repayment terms that you can confidently afford.

Do I qualify for a Debt Consolidation Loan?

Shop around for the best deal from high street and internet lenders. If you have a poor credit rating, you may not be able to get loans on the best terms.

In order to qualify for a debt consolidation loan, you need to contact a credit broker or Lender who will then assess your circumstances either through an online application, over the phone or face to face.

If you don’t meet the Lending criteria, you may not be able to get a debt consolidation loan at all. If you had been considering one because you can no longer afford or manage your existing credit commitments, you may need to consider other debt management options like a Debt Management Plan (DMP), Debt Relief Order (DRO), IVA (Individual Voluntary Arrangement) or Bankuptcy instead. At Swift Debt Help, we can assess your situation and help with alternative financial solutions. 

Important: In order to check that you meet their lending criteria, you may need to provide details of your income and your expenditure, as well as your financial history. You will also be subject to a credit check, which will determine what loans you are offered and what interest rates you can get. If you have poor credit, the interest rates may be higher.

The Advantages of a Debt Consolidation Loan

For some people debt consolidation loans can be the best option to reduce the stress of managing multiple debt repayments. These are some of the advantages of this debt management strategy:

Affordable Payments

You may qualify for a debt consolidation loan with an affordable payment and a loan term that suits you. This can be beneficial if you have already negotiated with creditors in the past and they are unwilling to compromise further.

Lower Monthly Payments

When you consolidate your debts, you are only paying a single interest rate, which may be lower than your credit cards, overdraft, and other debts. You can also extend the loan term and pay the money back over a longer period, so your monthly payments are lower and it is much easier to fit them into your budget (however, the total cost of credit over the term may be higher).

Manageable Payments

Trying to manage a budget is difficult when you have multiple debt payments all due at different times of the month. It is easy to lose track and miss payments, making the situation worse. With a debt consolidation loan, you only need to keep track of a single payment, so it is far more manageable.

Impact on Credit Score
Your credit score is damaged when you miss debt payments. If you are struggling to maintain existing debts, you are at risk of your score being damaged should you fail to make any of the agreed repayments. Taking a debt consolidation loan can ease the pressure of managing multiple payments. Making your payments on time to your creditors is beneficial if you want a positive credit score.  

The Disadvantages of a Debt Consolidation Loan

Although debt consolidation loans have a lot of advantages, there are potential downsides that you must consider. These are the disadvantages of a debt consolidation loan:

You Will Pay Back The Full Amount
Some debt management options (like an IVA, DRO or Bankruptcy) allow you to write off a portion of the debt. But with a consolidation loan, you will usually have to pay back the full amount. 
Interest Will Apply
You will have to pay interest on your debt consolidation loan. The rates will depend on your credit score, so if you have poor credit, it can be expensive.
You Could Pay More Than You Currently Owe
Although many people save money with a debt consolidation loan, you could pay more than you currently owe. If the interest rate is particularly high and the loan term is longer, the total amount may be higher than the sum of the individual pieces of credit.
The Loan Term May Be Longer
Often, the term on a debt consolidation loan is longer than your current debts. On the one hand, this means that monthly payments are likely to be lower and more manageable. However, it does mean that you will be paying the debt back for longer.
Secured Loans Put Your Home At Risk

If your consolidation loan is secured on your home, and you don’t make your repayments, your home is at risk. 

    You May Not Qualify For Debt Consolidation

    If you have a lot of debt and your credit score is particularly low, you may not qualify for a debt consolidation loan at all. If this is the case and you want to discuss alternative financial solutions please complete the form below and we will be in contact.

      Before deciding the best way to consolidate debt and pay back what you owe, it is important to consider all of the advantages and disadvantages. In some situations, it will help you save money and clear your debts. But for some people, other debt management solutions are more suitable.

      • Arrangement Fees

        You may have to pay fees for arranging the loan. Always ask for full written details of all fees.

      • Risk of Repossession

        If the loan is secured on your house or other asset, then it could be taken from you if you do not keep up the payments.

      • More Expensive Overall?

        In the long run, the cost could be greater as it’s is normally spread over a longer period and so total interest repaid can be more.

      • Poor Credit Rating?

        If you have a poor credit rating, you may not be able to get a loan or you may be offered poor terms, for example a high interest rate.

      • Changing Interest Rate

        Interest rates often change over the loan period, making it difficult to work out what the total cost of the loan will be – check if the interest rate is fixed or variable.

      • Not Clearing All Debts?

        If you don’t clear all your existing borrowing, the new loan is likely to make your debt problems worse and make it more difficult for you to make all your payments.

        We do not currently offer loans. However we can assess your situation and explain the other options available

        Can I get a debt consolidation loan with a bad credit score?

        Debt consolidation loans are issued at the discretion of the lender, just like any other personal loan. They will assess your financial situation and look at your credit score when deciding whether to give you a loan or not. 

        If you have a bad credit score, you may still be able to get a loan. If this is the case, you may be considered a high risk borrower, which means that interest rates could be higher. You can improve your chances of being accepted by applying for a secured loan with your home as collateral, but this does come with added risks.  

        Do banks offer debt consolidation loans?

        Yes, most banks offer secured and unsecured loans for debt consolidation. When considering a loan, it is important to compare options from a variety of different lenders, including debt consolidation companies as well as banks. 

        Are personal loans good for debt consolidation?

        You may be able to take out a standard personal loan to cover your existing debts. This can be an effective solution, depending on the terms you are offered. If you can get a lower interest rate, you may save money. Personal loans can also allow you to lock the interest rate, so you are not vulnerable to rate increases during the loan term. 

        However, the interest rate could be higher and if you have a long loan term, you might pay more overall. 

        Before taking out a personal loan, ensure that the funds can be used for debt consolidation, some lenders will have specific guidelines about what you can and can’t use the loan for. 

        Should I get a debt consolidation loan for credit card debt?

        Consolidation loans are a good way to manage credit card debts if you have multiple cards with different lenders. Consider the interest rates and whether they are better or worse than a consolidation loan would be. If you have a favourable interest rate on your credit cards, it may be worth paying your existing debt instead of getting a consolidation loan. This is especially true if you only have one credit card, which is relatively easy to manage. Debt consolidation loans should only be used when they will save you money and allow you to manage your debts more effectively.

        You can also use 0% interest balance transfer credit cards to move the balance and avoid interest payments for a limited period. This gives you an opportunity to pay off the debt before interest payments start again. However, you will only usually be able to get these cards if you have a relatively strong credit rating.