A debt consolidation loan is a popular product used by thousands of Britons every year as a way to help pay off multiple debts. David Beard, founder of price comparison site Lending Expert, explains.
With this type of product, you are able to take any outstanding debts that you owe including credit cards, personal loans, mortgages and more - and place them into one single point of repayment, hopefully at a more affordable rate too.
This process should be more practical, convenient and help you to eventually become debt-free.
With the average British household needing around £19,000 to run their home each year and to stay on top of the bills, this can be an effective form of finance, but there are things you should consider.
The pros
A debt consolidation loan could be the right option for you if you have several different types of loans and credit cards outstanding - and it is becoming a little too much to handle.
If you fall behind on things like personal loans and credit cards, you can be charged late fees or arrears and these can start to add up.
With a debt consolidation loan, you are essentially paying off all of these outstanding debts in one go - and then you just have the one loan outstanding to pay the loan provider. So overall, this could save you money from any potential late fees and arrears payments.
Plus, if your debt consolidation loan is at a competitive rate, you could be saving money overall. Low rates are available if you have a good credit score and stable income - and this would be an unsecured loan.
You can also use a secured loan and borrow money against your home or property - and if your property is valuable, this could help you borrow large sums and at competitive rates too (starting from 3% APR).
The cons
Although debt consolidation can be effective, there are some things to look out for.
While you might be paying a low rate for your loan, you need to calculate this carefully. If your loan is extended for a longer period eg 3, 5 or 10 years, the interest will start to add up and you could be paying more overall.
If you are looking at a secured debt consolidation loan, this will be using your home as security and if you are prone to falling behind on repayments, this could put your family home at risk of repossession.
Debt consolidation is great for consolidating your existing debts and anything that you have outstanding. But the benefits of having one single place to repay will not be enjoyed if you start to add more debt to your name, such as car finance or additional credit cards.
So debt consolidation could be best if you have made all your big purchases in life such as a house, car and weddings - but it could be less suited if you still have a lot of debt to come.
What are the rates offered?
The interest rates may vary depending on your credit score and if you are using security.
At the low end, you could be paying 3% APRC or 99% APR depending on your credit history, use of security and the type of lender you choose.
A debt consolidation loan can be a very effective way to manage and pay off your existing debts, but it is not for everybody.
A lower rate is not always a lower rate if you extend your loan for several more years - in which case the interest can accrue and you end up paying more. It is always important to consider your options, whether it is a debt consolidation loan, using a credit card balance transfer at 0% or even borrowing from family members to help manage your debts.
If you are thinking of consolidating existing borrowing you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.
To see if a debt consolidation loan is right for you, you can check your eligibility for free with Lending Expert today or simply call 0161 820 8099.
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