What is a debt consolidation loan?
A debt consolidation loan is quite simply one loan used to pay off all of your debts, leaving you with only one payment to make.
These loans are available to anyone but may be harder to obtain if you’re struggling with debt and your credit score has been affected. Technically, there is no criteria to be able to use this debt solution, but you may come across some depending on the loan company you use and you must be in a good position to be able to pay it back.
There are two types of debt consolidation loan – secured and unsecured. The difference between the two is that one is taken out against one of your assets such as your home, and the other isn’t.
It’s important to note if you opt for a secured loan, then your assets will be at risk. As such, it’s best to do as much research and get as much advice as you can to make sure this is the best way for you to deal with your debts.
What are the costs of a debt consolidation loan?
Your payments will depend on how big a loan you need to take out, interest rates and – most importantly – the fine print.
Some companies will offer you lower interest rates, and most of the time the payments will seem affordable at first glance. However, this usually means it will take you a very long time to pay it back and it’s always best to work out a budget to be sure that you will be able to keep up with the payments.
One of the most important things to watch out for is being scammed or tricked into taking on a consolidation loan that will end up causing you more distress than you started with. There are no government schemes that offer you consolidation loans and there will be no loans that are ‘interest-free’.
Debt consolidation loan advantages and disadvantages
This solution can be great if it’s used properly, but as with all things in life, it comes with its drawbacks. To help highlight both sides, we’ve laid out the benefits and disadvantages for you below:
- You’ll only have to worry about making one payment towards your debts
- It makes your debts much easier to deal with
- If you keep up with payments etc., it can be a great way to help improve your credit score
- Interest rates can be lower
- You’re using credit to pay back credit
- Interest rates can also be higher than normal
- There could be fees in the small print that means you are charged for paying the loan early or late
- You will likely end up paying back more than your overall debt level depending on how long you choose to pay the loan back in
The debt consolidation loan process
The process for this solution is straight forward, but we thought we’d lay it out the different steps below:
It’s never a good idea to take on the first loan you come across.
If you decide that this is the solution for you, then shop around for different interest rates and repayment amounts. Working out your budget before doing this will allow you to know what you can afford and help you know what payments will be suitable for you.
It’s also good practice to run them through comparison sites to make sure you get the best deal possible.
Once you have found the right loan for you, it’s time to fill out the application. You can do this online for the most part, but it is possible to do this in person if you are applying through a bank.
You’ll need to give details about your income and your outgoings in order to prove you can afford the payments. You will also likely need to send copies of statements etc. as evidence to back these up depending on how much you are looking to borrow.
Once you have submitted the application, you may have to wait a few days for the company to either approve you for the loan or not.
If your loan gets approved, you generally will be paid instantly or within a few days. Once the money is in your account, then it’s time to pay back your debts.
It’s best to pay off the debts that you are struggling with the most first. This will help to stop any action they may be attempting to take against you and stop any further charges being added to your balance.
You can then go ahead and pay back the rest of your debts, making all your balances clear and leave you able to close the accounts down. All you will then have is the one loan payment to make instead of several.
Now that you’ve cleared all your debt, you just need to keep up with your loan payments. It’s important that you do this, as falling behind may land you in just as much trouble as you started with.
As long as you do this, you will be set to start again, keep your credit score in good shape and, hopefully, better your money management skills.