What are the pros and cons of a debt consolidation loan?
Pros:
- Reduced monthly payments by putting your multiple debts that are all accruing interest into one place. A single debt consolidation loan could have a lower interest rate, saving you some cash.
- Longer repayment period because you could spread the debt over a longer period. This could bring down the amount you pay each month.
- 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. This makes it harder to get credit or take out a loan in the future.
- Additional fees are needed 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 can’t keep up with secured loan payments. You risk losing the asset you used to secure the loan, like a car or home.
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Does a debt consolidation loan hurt my credit score?
Your credit score will only be harmed if you can’t 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 apply for the 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 want 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 depending on 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 charge higher interest rates.
We’ve got some helpful tips on how you could improve your credit score if yours isn’t looking too great. If you have a poor credit history, getting approved for a loan can be difficult, but there are options available to you. Some lenders can offer loans to people with bad credit, but at a higher interest rate. Find out more about bad credit loans.
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.
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