Debt consolidation loans can help you combine all your debts into a single, organized loan. Manageable repayments will reduce the chances of a default, hence improving your credit score. But what type of debt consolidation will yield better results for you? Read on to learn more.
It’s payday, the last day of the month and people are happy to reap the fruits of their month-long hard work. But some of us can only enjoy that bank balance for, at most, the first two days after getting paid. Soon after, all that money will vanish into paying loan arrears, bills or rent.
But that’s not the only problem. If you have multiple loans, you’re probably making several repayments each month, which is a hectic task. Even a single payment failure can have a lasting impact on your credit rating.
Dealing with multiple debts can wreak havoc in your financial life. Managing repayments for a single debt is less complicated. But is there a way for you to combine your debts into a single loan?
Fortunately, debt consolidation loans can help. Debt consolidation loans help you organize your debts to manage repayments more efficiently. However, it’s important to understand that debt consolidation does not reduce the total debt but rather simplifies its management.
Let us learn more about debt consolidation loans and the kinds of debts that you can consolidate. Unsecured or secured debt consolidation loans – what’s better for you? Read on to find out!
Representative Example: £12,000 over 66 months, 31.9% APR fixed. Monthly payment £358.22 Annual interest rate 28.01% fixed. Interest payable £11,642.52. Total repayable £23,642.52. Representative Example: £12,000 over 66 months, 31.9% APR fixed. Monthly payment £358.22 Annual interest rate 28.01% fixed. Interest payable £11,642.52. Total repayable £23,642.52. Representative Example: Loan Amount: £20950.00, Loan Term: 85 Months, Interest Rate: 23.00% PA Variable. Monthly Repayments: £537.44. Total Amount Repayable: £45,682.15. This example includes a Product Fee of £2,095.00 (10% of the loan amount) and a Lending Fee of £714.00 Representative Example: Loan Amount: £20950.00, Loan Term: 85 Months, Interest Rate: 23.00% PA Variable. Monthly Repayments: £537.44. Total Amount Repayable: £45,682.15. This example includes a Product Fee of £2,095.00 (10% of the loan amount) and a Lending Fee of £714.00 Representative Example: Borrowing £3000 over 36 months with a representative APR of 39.9% (variable),the amount payable would be £134.21 a month,with a total cost of credit of £1831.56 and a total amount payable of £4831.56. Representative Example: Borrowing £3000 over 36 months with a representative APR of 39.9% (variable),the amount payable would be £134.21 a month,with a total cost of credit of £1831.56 and a total amount payable of £4831.56.Maximise your options: Compare and apply for loans below with LoanTube
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£4000 -
£20000
Norwich Trust
Loan Term
1 -
10 years
4.8/5
Representative APR
31.90%
Minimum Age
21 Years
4.8/5
Norwich Trust
Loan Amount
£4000 -
£20000
Loan Term
1 -
10 years
Representative APR
31.90%
Minimum Age
21 Years
Minimum Income
£2000 per month
Loan Amount
£5000 -
£100000
Evolution Money Loans
Loan Term
1 -
20 years
4.5/5
Representative APR
28.96%
Minimum Age
18 years
4.5/5
Evolution Money Loans
Loan Amount
£5000 -
£100000
Loan Term
1 -
20 years
Representative APR
28.96%
Minimum Age
18 years
Minimum Income
Not mentioned
Loan Amount
£1000 -
£10000
1Plus1 Guarantor Loans
Loan Term
1 -
5 years
4.4/5
Representative APR
39.90%
Minimum Age
18 years
4.4/5
1Plus1 Guarantor Loans
Loan Amount
£1000 -
£10000
Loan Term
1 -
5 years
Representative APR
39.90%
Minimum Age
18 years
Minimum Income
Not mentioned
What are debt consolidation loans?
- Debt consolidation loans are fundamentally personal loans that help you organize multiple debts. You can combine all your debts into a single loan to make repayments more manageable. This way, you can pay-off numerous debts in a single monthly repayment.
- A common misconception among people is that their debt consolidation loans can automatically write-off their debt. In reality, however, that’s not how debt consolidation loans work. When you borrow a personal loan to consolidate your debts, the loan pays off your outstanding balances from all the existing loans. Now that you have paid off these loans, you only have to repay your debt consolidation loan.
- Most lenders report your repayment activity to credit bureaus, meaning each repayment counts towards a credit score boost. So if you’ve been sincerely paying down your debts, your credit score would have most likely improved. Now that you have a good credit score and stable income, you might find debt consolidation loans with competitive interest rates. This new interest rate may even be lower than the combined interest of all your debts.
- You must work out the exact amount of money required to consolidate all your debts. A debt consolidation loan is ideal only if you resolve to limit your expenses and refrain from taking on any new debt. Even if you continue to spend using your credit card, be sure to keep the balance low.
What kinds of debt can I consolidate?
Debt consolidation can help you defuse the ticking time-bomb of debt. Here’s what you can consolidate with a debt consolidation loan:
- Credit card debt
- Personal loan arrears
- Store / promotion card debt
- Bank overdrafts
- Payday loan arrears
- Unexpected medical bills
Remember that debt consolidation will only make sense if you stick to your repayment schedule and pay in full. If you continue to miss repayments, it’ll be detrimental to your credit score. Not only will this hamper your chances of securing credit in future, but might also land you a County Court Judgment.
Will a debt consolidation loan impact my credit score?
- Debt consolidation loans can help build or improve your credit score, provided you make timely repayments. You will benefit from this form of credit as long as you oblige to the terms and conditions.
- Failure to keep up with repayments can gravely impact your credit score. Assessing your affordability beforehand will help you minimize the chances of a default. When you’re tackling credit card debt with a debt consolidation loan, you’re dealing with revolving debt. With this, your credit utilization ratio will reduce significantly, improving your credit score.
Secured Vs Unsecured debt consolidation loans
Debt consolidation loans can be categorized as secured and unsecured loans.
Secured debt consolidation loans
- A secured debt consolidation loan is one wherein you use collateral security, usually your home, to get a loan. The bright side of using a secured debt consolidation loan is that they have relatively lower interest rates. A key reason for this is that secured loans pose a lower risk for lenders, unlike unsecured loans. If you were to default, the lender could seize and repossess your asset to recover their loss. Secured loans also allow you to borrow a relatively large sum of money over a longer-term. A default may risk your collateral.
- However, remember to stick to an amount that you can afford to borrow. If you fail to repay a secured debt consolidation loan, you’re jeopardizing your home, perhaps your only property. Moreover, some lenders set variable interest rates on secured loans. Variable interest rates are subject to changes upon changes in the BoE base rate. So there’s a fair chance that they might rise in the future.
Unsecured debt consolidation loans
- Unsecured debt consolidation loans are the less perplexing alternative to secured debt consolidation loans. Herein, you don’t have to declare collateral to secure a loan. You can pay off this loan over a mutually agreed period, through fixed monthly instalments.
- The upside of using unsecured debt consolidation loans is that they are less complicated and easier to arrange than secured loans. You won’t need to prove ownership of a property or show equity to get this loan. Moreover, your home is not at the risk of repossession, in case of a default.
- Unsecured debt consolidation loans are less risky from a borrower’s point of view. But there’s greater risk involved from a lender’s perspective. In the event of a default, the lender cannot count on your collateral to cover their loss. For this reason, unsecured debt consolidation loans have relatively higher rates of interest and smaller loan amounts. Further, the loan term for unsecured loans tends to be shorter, usually up to 7 years. You might have to pay more in your monthly instalments.
Which debt consolidation loan is right for me?
- Your financial circumstances will dictate which type of debt consolidation is best suited for you. Weigh the pros and cons of each, considering your requirements to make an informed decision.
- If you own a property and possess some equity, you may choose a secured debt consolidation loan. However, it is important to have an acceptable LTV to avail the featured offers from lenders. On the contrary, if you have a clearer plan in mind and will be able to defuse your debts in a shorter span, you may consider unsecured debt consolidation loans.
- Although, a smart way to find loan offers with competitive rates is by rate shopping. Visit LoanTube to compare rate-locked personal loan offers from multiple lenders and find your ideal loan.
Find a Loan That Suits Your Needs
Know this before opting for debt consolidation loans
- How much money will you need to borrow to pay off all your debts?
- How long will currently take for you to repay all your debts? This will help you choose an appropriate repayment period for the new loan.
- What amount are you currently repaying in monthly instalments? Will you be able to afford this loan?
- What interest are you paying on the loan? Can you qualify for lower rates?
