If you have multiple debts, it can feel like the circus act of spinning plates. You need to keep an eye on them all the time to make sure that everything is still balancing as it should. And there’s always that nagging feeling that there’s something you need to do to make sure nothing comes crashing down around you.
Having multiple debts can be complicated and stressful – not to mention expensive. So one solution that many people turn to is debt consolidation loans. But what is a debt consolidation loan and how does it work?
In this article we take a look at:
- What is a debt consolidation loan?
- What are the advantages and disadvantages of a debt consolidation loan?
- How do you find a debt consolidation loan?
What is a debt consolidation loan?
A debt consolidation loan is a new loan that you take out with the specific purpose of using it to pay off all existing debts. So, for example, if you have two existing loans, three credit card balances, and are using your overdraft, you could take out one new loan to pay them all off. This would result in just one remaining loan and one monthly loan repayment to make.
Some lenders offer specific debt consolidation loans. There are also many lenders who offer personal loans online which could also be used for debt consolidation.
What are the advantages and disadvantages of a debt consolidation loan?
There are both advantages and disadvantages of a debt consolidation loan. Here are three of each:
Advantages of a debt consolidation loan
- The main advantage is that if you take out a debt consolidation loan you will be left with only one monthly loan repayment to make. This is much easier than trying to balance a number of different payments. It also means that if your financial situation improves, you can pay any extra money into the loan and repay it early, rather than trying to spread money around different repayments.
- If you have a debt consolidation loan you know how long you need to make repayments for and when the loan will end. This is much less stressful than open ended debts such as credit cards, which are costly and can trap you into an ongoing cycle of debt where you end up just paying off the interest each month rather than the actual balance.
- Taking on a new loan and managing it responsibly could help to improve your credit score. Remember that you will need to have a good enough credit score to be accepted for a new loan in the first place. But once you have this loan, have paid everything else off, and are keeping up with loan repayments, this fresh information will help to update your credit score and increase it if needed.
Disadvantages of a debt consolidation loan
- One of the main risks of a debt consolidation loan is the temptation to spend more money and get further into debt. Once those credit card balances are clear it can be all too easy to start using them again. But it is essential that you don’t do this, because you could end up back where you started. So for a debt consolidation loan to be effective it needs to be part of a larger overhaul of your lifestyle and spending choices.
- A debt consolidation loan can save you money on high interest rates, for example those paid on credit card balances. But when deciding how long to take your loan out for, you need to check the total amount you will be repaying. The longer the repayment period, the lower your monthly repayments will be. Whilst this can be a good thing when you are making a fresh start, remember that the more repayments you make, the more interest you will pay.
- Some lenders charge to set up a debt consolidation loan, and may also charge if you decide to repay it early. So just beware of hidden charges, especially if you apply for debt consolidation loans or personal loans online. Look for a lender that charges no fees for either loan set up or early repayment.
How do you find a debt consolidation loan?
Many lenders offer specific debt consolidation loans, and others offer personal loans that you can use for any purpose you choose. So there should be a range of options available. A few pointers to help you find the right loan for you are:
- Check your credit score to see if you are likely to be accepted for a new loan. You can do this with one of the three credit reference agencies in the UK: Experian, Equifax or TransUnion.
- Ensure that the lender is fully regulated by the FCA (Financial Conduct Authority);
- Check whether there are any fees to set up the loan or to transfer other loan balances across;
- Check whether you would be charged any early repayment fee if you decided to repay your loan before the end of the loan term;
- Make sure you know the total amount you have to repay, how much each repayment will be, and how often you need to make those repayments. You need to be confident that you can afford this new loan;
- Ensure the loan is not secured on any of your other assets, for example your home.
As well as the above, the main thing to be sure about when considering a debt consolidation loan is that you will use it to get on top of your debts once and for all, and will not let things mount up again. If you are determined to do this, a debt consolidation loan could be a good way forward for you.
We hope that the information in this article helps you to make the right decision as to whether a debt consolidation loan is for you.
And remember that if you need a loan for any purpose, Munzee offers personal loans online that may be able to help.
Check back here soon for more financial and lifestyle tips from Munzee Loans.
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