Debt consolidation loans

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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
  • Overdrafts
  • Store cards
Once you’ve entered the information, you can look for quotes from a variety of lenders and compare debt consolidation loans to find the one that suits you best.

Pros and cons

Pros

Reduced monthly payments as you’re putting your multiple debts that are all accruing interest into one place. The single debt consolidation loan could be at a lower interest rate, which may save you you some cash.

Longer repayment period because you could choose to spread the debt over a longer period. That could potentially bring down the amount you pay each time.

Improve your credit score by taking control of your loan repayments and making regular payments on time.

Pay with ease as one payment is a lot easier to manage than several.

Cons

Missing payments on a debt consolidation loan could negatively affect your credit score, making it more difficult to get credit or borrow from loan companies in the future.

Additional fees are required to set up the loan. These can be incurred while settling existing loans or transferring the balance of your loans from your existing creditors.

Loss of assets if you’re unable to keep up with payments. If it’s a secured loan you risk losing whatever asset you used to secure the loan, such as a car or your home.

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
Once you’ve entered the information, you can look for quotes from a variety of lenders and compare debt consolidation loans to find the one that suits you best.

FAQs

Does a debt consolidation loan hurt my credit score?

Your credit score will only be harmed if you’re unable to make your payments. When comparing debt consolidation quotes, we only run a soft credit check. This doesn’t affect your credit score. A hard credit check is only made when you go-ahead and apply for a loan. Picking a debt consolidation loan that suits your financial situation can help improve your score as you’re paying it all back on time.

Do I have to get a debt consolidation loan to cover all my debts?

No, if you have a particularly good rate on one of your loans, you may not wish to switch it to a debt consolidation loan.

How much does a debt consolidation loan cost?

Like with all loans, how much you pay will depend on the interest rate you’re given and the total cost of the APR. These will vary according to the amount you’re borrowing, the length of the debt consolidation loan term and your financial situation. Your credit score also affects the cost. If your score is low, loan companies tend to charger higher rates of interest. We’ve got some helpful tips on how you could improve your credit score if yours isn’t looking too great.

How much do I need to borrow?

You should borrow enough to cover your debts after working out how much you owe in total. This includes any additional fees and the overall interest. Additional fees can include things like early repayment charges. Your current lenders should be able to give you details on these. Borrowing more than you need only increases how much you have to pay back, as well as the debt you’re trying to get out of.

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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Confused.com’s Personal Loan solution is offered by Monevo Limited. Monevo Limited (Monevo) acts as a credit broker not a lender. Monevo which is an Appointed Representative of Quint Group Limited (Quint), and is entered on the Financial Services Register under reference number: 723672. Quint is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register under reference number: 669450. Monevo is registered in the UK with its registered office at Oxford House, Oxford Road, Macclesfield, Cheshire, SK11 8HS.