What is a debt consolidation loan?A debt consolidation loan lets you combine different debts into a single payment. If you’ve got some ongoing loan payments, like credit cards, overdrafts or other loans, a debt consolidation loan could be a good option for you.
By using a debt consolidation loan to pay off your outstanding debts, you'll have just one payment to make each month as you repay the lender for this consolidation loan – at one single interest rate. Rather than having lots of payments, all at different and sometimes higher interest rates.
How does a debt consolidation loan work?
First you need to work out how much you owe in total. Once you've added it all up, you can apply for loans for that amount. Then you'll be paying off your payments as one loan with the one interest rate.
What are the different types of debt consolidation loans?There are two types of debt consolidation loan, secured and unsecured. A secured debt consolidation loan requires you to secure an asset against the loan, like your home or your car. This will act as collateral against the money you've borrowed.
Because secured loans put an asset against the loan your chance of being accepted can be higher. However, if you fail to meet your repayments, your home or car could be repossessed. So, make sure you weigh up the risks before applying.
With an unsecured debt consolidation loan, you won't have to put up any assets against the money you've borrowed. This does mean the interest rates might not be as good as on a secured loan. An unsecured loan could be the right option if you don't want to use your assets against the debt consolidation loan.
What can a debt consolidation loan be used for?
A debt consolidation loan can be used to help pay off a number of different types of debts, including:
- Personal loans
- Credit cards
- Payday loans
- Medical bills
- Store cards
Pros and cons
Is a debt consolidation loan right for you?
It's important to weigh up the pros and cons of taking out a debt consolidation loan to make sure it's the right choice for you. You don't want to be left any worse off, so think carefully before applying.
If the loan amount won't cover all of your current debt repayments or if you've nearly paid off your current debts, you could look at other options. You could also look elsewhere if the fees to take out a new loan are so high that they outweigh the benefits of taking out a brand-new loan.
Another option if a debt consolidation loan isn't right for you is to look at a balance transfer credit card.
How to get a debt consolidation loan
If you think a debt consolidation loan may be right for you but still have doubts, it’s worth contacting a debt advisory company for a second opinion. They’ll be able to help and give you some professional guidance. They might recommend a debt consolidation loan or suggest some alternatives.
Want to go forward with a debt consolidation loan? Great! But you’ll have to do some homework first. To make sure you get the best deal you’ll have to do the maths and work out exactly how much your debts are in total, including the outstanding interest and any fees.
After you decide to get started and compare loans, we'll need a few bits of information from you, including:
- The amount you’re looking to borrow
- How long you’ll be paying back the loan for
- Your UK address and any previous addresses you’ve had over the last 4 years
- Your monthly income and outgoings
Comparing loans with Confused.com and Monevo
We’ve teamed up with experts Monevo to offer the best possible deals on unsecured and secured loans. With Monevo’s service you get:
A free service with no obligation to apply once you’ve got your rate
Eligibility checks with no impact on your credit score - lending partners run a soft search on your credit file which doesn’t affect your score
If you’re thinking of applying for a secured loan: think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
If you’re 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.
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