Need more info? Here are a few of our most frequently asked questions on this topic. If you don’t see the answer you’re looking for here, give us a ring – we’d love to help.
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.
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.
Answer these questions below to find out whether you fit into the criteria to get a debt consolidation loan:
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.
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…
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.
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.
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.
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:
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.
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.
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.
Debt consolidation can be used to pay off different types of debt. These include:
There are several debts that typically can’t be resolved through debt consolidation. Some of the most common ones include:
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:
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.
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.
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.
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:
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.
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.
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?
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.
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.
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.
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.
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.
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.
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.
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:
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.
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.
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 are agreements between borrowers and lenders on how any outstanding debts should be repaid. DMPs are usually set up by third parties.
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 orders are a formal insolvency option for borrowers with low levels of debt and minimal assets.
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.
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.
Need more info? Here are a few of our most frequently asked questions on this topic. If you don’t see the answer you’re looking for here, give us a ring – we’d love to help.
You can combine all your debts into a single loan through debt consolidation. It involves taking out a debt consolidation loan to cover your existing debts instead of making many separate payments to multiple lenders. You then repay your consolidation loan by making one monthly payment to your loan provider.
You should get just enough to cover your existing debts. With a debt consolidation loan, you should never borrow more money than needed since that could increase your repayment costs and push up your overall debt.
You don’t have to consolidate all your debts. You can choose which debts you wish to consolidate. For example, if you have a good interest rate on one of your debts, you can still choose not to consolidate it and pay it separately.
But keep in mind one of the main benefits of debt consolidation is that you only owe money to one creditor instead of many.
Taking out a debt consolidation loan will hurt your credit initially. There could be a credit check and your credit utilisation ratio would also dip, resulting in a lower credit score.
Assuming you do not default and are able to make all your payments on time, your credit score might improve gradually.
Consolidation does not help with all types of debt problems. Whether it is the best way to deal with debt depends a great deal on your circumstances and level of debt.
Consolidation may not be the best debt solution for everyone. In fact, if you take out a debt consolidation loan, you might end up paying a higher total interest over a longer period of time.
If you have a low credit rating, it might be harder to find a lender willing to let you borrow. Even if you get an offer you should act cautiously – it’s very likely that your loan offer comes with high-interest rates and hefty penalties.
Some of the details you may need to share with your loan provider include:
● All the addresses you’ve lived at since the last three years
● Your employer’s details including their contact number and address
● Your email address
● Detailed information about your monthly income and outgoings
● Your bank or building society account details
Consolidating debt, especially with a poor credit rating, is not the best solution for most borrowers. Debt consolidation loans are risky and can be difficult to get. They could also add to financial distress instead of reducing it.
Interest charges can differ according to the size and duration of the loan, as well as the lender themselves. Taking out a debt consolidation loan for a longer period might lower the monthly payments or interest rates – but you’ll usually be making payments for longer. Borrowers with bad credit scores are more likely to get offers with steeper rates of interest.
If you’re in the UK and need help with debt problems, reach out to our debt experts. Money Advisor is committed to supporting everyone struggling with debt.
Simply complete the form to see if you qualify for any of the available debt solutions.
A friendly & experienced advisor will contact you to discuss your circumstances.
We will refer you to FCA Regulated Advisors who will explain all your options, so that you can decide which solution works best for you!