What is a Debt Consolidation Loan?

A Debt consolidation loan allows borrowers to combine multiple small debts from different creditors into a single monthly payment, usually with more favourable terms such as a lower interest rate, lower monthly payments or both.

Taking out debt consolidation loans is a form of debt refinancing; borrowers usually take out a single loan to pay off many different existing debts like loans, overdrafts or credit card borrowing. This way, instead of making smaller payments to multiple lenders throughout the month, borrowers just have to make a single monthly repayment to one lender.

Debt consolidation sometimes makes it easier for borrowers to keep track of their debts, manage their finances and control their cashflows while making repayments. If you want to know whether debt consolidation is the best way to manage your debts, consult a professional debt advisor.

How does Debt Consolidation work?

Consolidating debt mostly involves taking out one big consolidated loan to repay multiple small debts. Borrowers who consolidate debt mostly reborrow a lump sum (also known as a debt consolidation loan) to repay their current debtors. That’s how they end up with only one lender and a single monthly payment.

Here are two of the most common methods to consolidate debt in the UK:

0% or Low-Interest Balance Transfer Card:

Borrowers transfer all their debts to this card and then pay all the balance during the promotional period.

Fixed-Rate Debt Consolidation Loan:

Borrowers first apply for a debt consolidation loan and use it to clear their existing debts. The debt consolidation loan is then repaid in the form of monthly instalments over a fixed term.

 

Types of Debt Consolidation Loans

There are primarily two types of debt consolidation loans; secured loans and unsecured loans. Let’s look at them:

Secured Loans:

A secured loan is a debt with which you have to attach a valuable asset (like your car or house) to act as a security for the loan. If you’re unable to repay a secured loan, your creditor can choose to seize your asset and sell it to recover the debt.

Unsecured Loans:

An unsecured loan, as the name suggests, is a personal loan that does not require an asset to act as a security for the loan.

Types Of Debts Covered

Most debts can be included in an IVA and your repayments reduced.

Loans & Overdrafts

Credit Cards

Benefits Overpayment

Council Tax

Debts with a Court Judgement

Rent, Gas and Electricity Arrears

Catalogue and Buy now, Pay later Debt

Loans & Overdrafts

Credit Cards

Benefits Overpayment

Council Tax

Debts with a Court Judgement

Rent, Gas and Electricity Arrears

Catalogue and Buy now, Pay later Debt

Debt Consolidation Loan Benefits

  • Affordable Repayment Plan:  A Debt Consolidation Loan is set up only after taking into consideration your income and household budget. This practice ensures that you are paying your creditors only what you can afford to pay.
  • The Convenience Factor:  If a debt management company is handling your Debt Consolidation Loan, you do not have to go through the hassle of tracking multiple payments. You will only be required to make one monthly payment to your DMP provider.
  • Increased Flexibility: If there is a change in your financial circumstances, your debt management plan can be altered accordingly to ensure that your payments are still affordable.
  • Help with Arrears: If you are lagging on household bills, you can include those arrears to your DMP – but you will still have to cover further usage with monthly payments.

Debt Consolidation Loan: Key Considerations

    Generally, debt consolidation loans may work for you if:  
  • Your savings are not wiped out by fees, additional charges, and penalties
  • You plan on cutting down on spending
  • Your loan does not clear all your debts
  • You’re paying less interest than you were paying before and the total amount payable is less (it can be more if you’re repaying your consolidated loans over a longer duration)

Debt consolidation loans may not work for you if:

  • You cannot afford the new loan payments
  • You have a poor credit history
  • Your loan does not clear all your debts
  • You need a proper debt management strategy instead of another loan.

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Your future starts today, contact us for help with your debts.

Trading address, Initial Business Centre, Wilson Park, Manchester, M40 8WN. Debt-help.org helps individuals find solutions to get out of debt and, whilst we do not provide advice, we can help you understand all the possible options and guide you through the process.

Money Helper is an impartial service set up by the Government. They provide free debt counselling, debt adjustment and credit information services.

Trading address, Initial Business Centre, Wilson Park, Manchester, M40 8WN. Debt-help.org helps individuals find solutions to get out of debt and, whilst we do not provide advice, we can help you understand all the possible options and guide you through the process.

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