Debt consolidation

If you are having trouble making debt repayments to your lenders, then it is time to get help. Don’t wait for the situation to get worse. Instead, look at the solutions available to you to get you out of debt.

A popular debt solution amongst many people who are facing debt problems is something called Debt Consolidation. Debt Consolidation is a way of combining all your debts into one single affordable monthly payment. It falls under debt refinancing. Refinancing involves taking out new credit to cover older debts.

Want to know more about what debt consolidation is? Do you want to find out whether you are eligible for a debt consolidation loan? Or how a debt consolidation loan will affect your credit rating? Have your questions answered here as we guide you through everything you need to know about the topic.

What is debt consolidation?

A debt consolidation loan is one way of combining multiple debts into a single monthly payment. Consolidating debt helps some people pay off credit cards, store cards and personal loans in a more manageable way.

The convenience of paying one monthly payment rather than multiple payments is often what attracts debtors to this type of debt plan, however with anything, debt consolidation comes with risks, so it isn’t for everyone.

Do I qualify for debt consolidation?

Answer these questions below to find out whether you fit into the criteria to get a debt consolidation loan:

1. Do you have a stable job or a steady source of income so that you can manage the repayments on time?
2. Is this the first time you are looking to get a debt consolidation loan?
3. Do you have a good credit rating?
4. Will you be able to cope financially even if your circumstances change due to, e.g., sickness from work or an increase in interest rates?

If you have mostly answered yes to these questions, then you could possibly qualify for a debt consolidation loan. However, it is important to remember that the decision to grant you a debt consolidation loan is entirely up to the lender. Most lenders prefer providing loans on a case-by-case basis.

Make sure you speak to a debt help expert before deciding to consolidate debt. You might be able to find other more suitable solutions to your debt problem if debt consolidation isn’t right for you.

Is debt consolidation loan good or bad?

A debt consolidation loan could help you get out of debt but only if you are in the right financial situation. Look at these statements below to help you determine whether a debt consolidation loan is right for you…

Debt Consolidation: Good Idea

• I have a good credit score

As this is a loan you will need to prove to the lender that you can pay it off the amount you will borrow. As well as showing evidence you have enough income to pay it off, you also need to be shown as a trustworthy borrower. This is where your financial history is scrutinised, and your bank looks at your credit history.

If you have a good, healthy credit check then you are a low-risk borrower. Your lender will be more inclined to give you the loan but if you have a bad credit history then this makes it trickier for your lender to offer you a loan.

• I have a stable income

You need to show the lender that you can pay off the debt consolidation loan at the agreed time. You need to show that your income is stable enough to last the longevity of the loan agreement. If you can’t then debt consolidation may not be the right option for you.

• I know what my spending habits are

Often people think that getting consolidating your debts will be the answer to all your debt woes, however, that is part of the solution. Knowing and accepting your bad spending habits is just as important as paying off your debts.

Understanding and changing the way you spend will help you tremendously in the long and short term. Budget planning is a good way to do this as it will show the areas you are overspending in and ways you could put an emergency fund in place. If you need a better understanding of your income and expenditure, download our free budget planner and itemise your financials.

Debt Consolidation: Bad Idea

However, there are things that identify why a debt consolidation loan might be a bad idea. Ask yourself these questions to find out certain signs where a debt consolidation might be a bad idea:

• Debt consolidation will be the only way to get me out of debt

Often people assume that debt consolidation will get you out of debt, but you must understand that all debt consolidation is doing is making your repayment simple and easier to complete. It won’t stop the cause of debt. You will still need to make monthly payments on the amount you owe. This is why it is important to look at ways in which you can reduce your monthly outgoings.

• I can’t control my spending habits

You are playing a dangerous game if you think debt consolidation gives you debt freedom. Don’t fall into that trap in thinking you have already paid off your original loans. If you are a shopaholic or are the first in line to queue to buy the latest gadget then it is time to rethink your lifestyle if you are in debt already. Instead, think before you buy and ask yourself whether you need it. If you can’t control this spending habit, either make the change or land yourself into more financial trouble.

• I will end up with a higher interest rate

What is the point in getting a loan that will give you a higher interest rate? A higher interest rate only adds to your financial problems. If you are offered a higher interest rate, which is usually due to bad credit history, then getting a debt consolidation loan might not be a wise decision. You may need to rethink your strategy or scrap the idea of debt consolidation and look at alternative solutions.

What debts can I pay off through debt consolidation?

Debt consolidation can be used to pay off different types of debt. These include:

• Credit card debt
• Personal loan debt
• Overdrafts
• Store Cards

What debts can’t I pay off through debt consolidation?

There are several debts that typically can’t be resolved through debt consolidation. Some of the most common ones include:

• Mortgage payments
• Car finance
• Court fines

Generally, if you’re trying to resolve a debt that is secured against an asset, you may be unable to do this through consolidation.

What types of debt consolidation loans are there?

A debt consolidation loan can either be a secured loan or an unsecured loan. Let’s look at these two types of loans in detail:

 What is a secured debt consolidation loan?

A secured debt consolidation loan is backed by a valuable collateral asset like your home, car or property. It’s sometimes called a homeowner’s loan in the UK.

The collateral acts as a security for the lender. This means that if you’re unable to pay back your debt, the lender can confiscate your asset and sell it to recover their loss.

 What is an unsecured debt consolidation loan?

You do not have to list your assets as collateral to apply for an unsecured debt consolidation loan. Typically, lenders will only let you take out unsecured personal loans worth £25,000 or less to help with debt problems.

 Secured vs unsecured debt consolidation loan?

A secured loan is generally easier to get since there is less risk to the creditor. Lenders are more likely to consider you for a secured loan if you’ve got a poor credit history or are trying to rebuild your record.

Secured debt consolidation loans have lower interest rates and higher borrowing limits. Your creditor might consider your financial history before approving your loan grant.

Unsecured debt consolidation loans present a higher risk to the creditors. That’s why it is harder to qualify for them.

Unsecured loans also tend to have higher interest rates and maybe the more expensive option in the long run. However, unsecured debt consolidation loans may work for those who need to cover the smaller debt.

How much does a debt consolidation loan cost?

Debt consolidation loans are tailored to assist you in managing your existing debt into one monthly payment. It is paramount that the loan will need to cover your existing debt value. However, how much debt will cost will depend on a range of factors:

1. Loan Amount – This will depend on the value of the debts you are planning to consolidate
2. Term – This will depend on how long you want to borrow.
3. Annual Percentage Rate (APR) This is the loan interest rate plus any other charges like annual fees or arrangement fees
4. Additional Fees – Loan providers may charge an early settlement fee if you want to clear the debt consolidation loan early

How do I apply for a debt consolidation loan?

Step 1: Get debt help

You might fit the eligibility criteria for a debt consolidation loan; however, it is always important to understand whether this refinancing option is the best to suit your circumstances. Speaking to an expert can help you evaluate your options and pick the right one to suit your needs.

Step 2: Pick between secured or unsecured debt

If you need to borrow over £25,000 you may need to choose a secured loan, otherwise, consider an unsecured option as it is less risky for you. Find out more about secured and unsecured debt consolidation loans in our ‘what type of debt consolidation loans are there?’ section.

Step 3: Decide how long you’d pay

Try to avoid extending your borrowing for any longer than you need. It will cost more and increasing a payment plan length can have a negative effect on mental health and your ability to pay back over longer periods.

Step 4: Go for the lowest interest rate

Rates differ depending on how much you need to borrow and for how long, so this step is important. It is also important to understand that a lower credit rating could mean that you are offered a higher-interest loan.

How long does a debt consolidation loan last?

You will find that in the UK, debt consolidation loans generally offer terms of between one and five years. If you need longer to pay your loan back, then some lenders do offer debt consolidation loans for up to seven years.

What happens if I can’t make repayments on my debt consolidation loan?

Making one late payment on a debt consolidation loan can impact you negatively. You are likely to be charged a late fee, but you will also be at risk of your interest rate increases, which as result means increasing monthly payments.

Try not to fall into the trap of not being able to make your repayments. However, if you do then contact your lender before your payment is missed.

Try and negotiate a grace period with them or maybe talk to them about waiving the late fee. Some lenders might be strict on their terms of the loan agreement, but others might show leniency. There is no harm in asking, right?

How will a debt consolidation loan affect my credit rating?

A debt consolidation loan could help or hinder your credit score. This really depends on how you manage it rather than you are applying for the loan itself.

How does checking your credit score and applying for a debt consolidation loan all work?

So how does it all work? When you apply for a debt consolidation loan, your lender will need to check your credit score to see whether you can be trusted to pay the monthly repayments of the loan. If they do this then it does leave a mark on your credit file to show that they have checked this.

However, this is not the issue. The problems arise when you have been rejected from debt consolidation loans and you keep getting rejected. This will then damage your credit history.

So, if you are thinking of applying for a debt consolidation loan, it is beneficial to check your credit rating first. Sometimes, mistakes can be made by creditors on your credit history.

Should I have my credit mistakes removed from my credit file before applying for a debt consolidation loan?

If you spot the mistakes yourself, have them removed and then apply for a debt consolidation loan. This could work in favour when submitting your application as a better credit rating opens your chances of getting a better interest rate deal on your loan.

Will a debt consolidation loan help my credit score?

Surprise, surprise! Like anything, it isn’t a straightforward answer. The certainty of it helping or hindering your credit score is not as clear-cut. It is what happens after you get a debt consolidation loan that really matters.

Debt consolidation could improve your credit rating in the long term as you are budgeting for one single debt payment rather than multiple repayments. When your budgeting is straightforward then it is likely that you will make a conscious effort not to miss your one monthly repayment.

Can a debt consolidation loan damage my credit score?

Yes, there is a likelihood that it will damage your credit score if you do not stick to the terms of your loan agreement. This could mean missed payments, leading lenders to take more serious action in recovering the money owed to them.

How will a Debt Consolidation Loan affect my future borrowing options?

Will debt consolidation stop my mortgage from being approved?

You might have seen your dream house you want to purchase, however, if you have a debt consolidation loan, then does this affect your mortgage approval?

Yes, it will affect your mortgage approval but not how you might expect it to. You might think that getting a debt consolidation loan could have a negative impact on getting a mortgage approved. In fact, you could be wrong and here is why.

Debt consolidation is seen as an early intervention strategy to stop people from getting into serious debt. Compared to other debt solutions which can affect your mortgage getting approved as they will leave a mark on your credit rating, debt consolidation does not always have a negative impact on your credit rating. It will only affect your credit rating if you start missing your monthly payments.

Remember getting a mortgage is a personal process. The benefits and the risks will differ among applicants. It is important to get mortgage advice on this matter further to understand your current situation.

Will a debt consolidation loan stop me from getting a car loan?

Remember what we said about spending habits? Quite often people get into debt because they overspend on luxuries. Of course, it is fine to treat yourself occasionally but only if you can afford it.

A car can fall under necessity especially when you need it to travel to work or it can be a luxury item. Before thinking of purchasing a car, it is important to consider whether you need such an expensive car. If you are already having trouble paying off your debts, ask yourself whether it is wise to try and get finance on a car? Or there is even the likelihood that if you are already in debt, your loan application could be rejected.

However, it does not mean you can’t get a car on finance at all if you have a debt consolidation loan. It just means that it will be harder as a finance company will look at your debt-to-income ratio is an important factor. The smaller your debt and the higher your income is, the more likely you are to be accepted for a car loan.

As well as this, whilst looking at applications they will also consider these six areas to check if you fit the eligibility criteria. Getting them in order will help your car finance application.

1. Can you afford it?
2. Do you have a valid driving licence?
3. Have you been keeping up with your current payments?
4. Do you have a good credit score?
5. Are you on the electoral roll?
6. Do you have a guarantor?

Are there other debt solutions apart from debt consolidations loans?

Taking out a debt consolidation loan is not an option for everyone. It can be more expensive compared to other debt solutions.

Consolidating debt also involves borrowing again and that’s not an appealing prospect for anyone already struggling with debt problems. Also, if you have a poor credit history, consolidating debt can become somewhat of a challenge.

If debt consolidation isn’t working for you, there’s a fair chance another debt solution will. There are plenty of other options available to borrowers who are struggling with debt payment. It’s vital to consider all your options before choosing one.

Here are some alternatives to debt consolidation loans:

Your Savings

If you have any savings, it’s better to use them to repay some of your loans instead of taking out a debt consolidation loan.

0% Money Transfers

Money transfers work by shifting the balance from a credit card into your bank account. You may have to pay a small transfer fee (usually 4%) but you will have a fixed period to pay off the balance interest fee.

Individual Voluntary Arrangements (IVAs)

Formal insolvency agreements are arranged by licensed insolvency practitioners. Individual voluntary arrangements work by combining many debts into a single affordable monthly payment that you have to make for a fixed duration (usually 5 years).

After an IVA term ends, any outstanding debt is written off. Some borrowers can write off up to 85*% of their debt through IVAs.

Debt Management Plans

Debt management plans are agreements between borrowers and lenders on how any outstanding debts should be repaid. DMPs are usually set up by third parties.

Bankruptcy

Bankruptcy is a type of debt solution. It is a legally binding agreement that is often used as the last option if you are having debt problems. This option is available to people living in England, Wales, and Northern Ireland. In Scotland, this is called Sequestration.

Being made bankrupt is a decision that should not be taken lightly, but often there is no other way out of debt. Being made bankrupt means that you will need to sell things that are of high value, such as your car or house, for money to pay your debts.

Debt Relief Order

Debt relief orders are a formal insolvency option for borrowers with low levels of debt and minimal assets.

Peer to Peer Lending

Peer to peer lending platforms is online spaces that connect borrowers in need with willing lenders. The rates depend on your credit ratings and how much you want to borrow.

Get help with debt consolidation

Applying for a debt consolidation loan is a major decision. It can have long-lasting consequences for you. That is why you should get debt help from an expert before making up your mind.

There are several companies that offer guidance and resources on the different debt solutions available to borrowers across the UK. If you need help with debt consolidation or are facing other financial difficulties, get in touch with us.