Borrowing money to consolidate a debt
Borrowing to Consolidate Debt: What You Should Know
If you’re juggling a few credit agreements, keeping up with repayments can become confusing – expensive too, especially if you’re juggling different interest rates across a several loans. To get everything in order, you may be thinking about borrowing money to consolidate the debt you have.
Here’s a look at what happens when you consolidate debt and what you need to know about the consolidation process.
What is debt consolidation?
When you consolidate debt by borrowing, you essentially take out a new loan and use it to pay off your existing debts. You’ll then make payments on the new loan instead.
This new loan is called a debt consolidation loan and it’s designed to help people pay off other debts. You take out the loan, receive a lump sum, and use it to pay off your outstanding balances. After that, you repay the new loan, plus interest, in fixed monthly instalments over an agreed period.
Some lenders and credit brokers, such as us here at Evolution Money, offer to pay your creditors directly, so you never see the money and the process is much simpler.
Others transfer the funds to your account, leaving you responsible for clearing your debts. Make sure you follow through immediately, otherwise you could end up with two sets of debts.
Why borrow money to consolidate debt?
One of the main reasons for borrowing money to consolidate debt is simplifying repayments. If you’ve got multiple loans, credit cards, overdrafts, or other debts, keeping up with them all can become confusing and stressful. Rolling them all into a single monthly payment means you know exactly what you need to pay each month and have a fixed term in place.
As well as getting your finances in order, consolidating your loans means that you might not have to pay as much each month. Most credit agreements come with interest rates, and you’ll be paying different rates for each loan – some more expensive than others. Bringing it all together means you pay one, potentially lower, interest rate.
Even if the rate stays the same or slightly increases, the convenience of a single payment can make it easier to budget and avoid missing payments, protecting your credit score in the process.
While a debt consolidation loan doesn’t reduce the amount that you owe, it can help you manage debt more effectively.
What happens when you consolidate debt?
Debt consolidation works differently depending on the type of loan you choose. In most cases, you’ll either take out a secured loan or an unsecured loan to cover your existing debts. There are both secured and unsecured debt consolidation loans available, so it’s important that you check the type you’re considering before you go ahead.
Secured loans
A secured loan uses an asset, usually your home, as collateral. Because lenders face less risk, you may get a lower interest rate and access to a larger amount of credit. However, you also take on more risk. If you can’t keep up with repayments, you could lose your home.
People sometimes use secured loans to consolidate large amounts of debt or to stretch repayments over a longer period. You could borrow up to £100,000 over 20 years in some cases. While this can lower your monthly payments, you could end up paying more interest over time.
Unsecured loans
An unsecured loan doesn’t require any collateral. It’s based on your creditworthiness, so your income, credit score, and financial history. These loans are often used to consolidate credit card balances or smaller personal debts.
Always check your eligibility before applying for any type of loan to avoid unnecessary hits to your credit file.
What debts can be consolidated?
You can usually consolidate a range of unsecured debts, including:
- Credit cards
- Store cards
- Personal loans
- Overdrafts
- Buy now, pay later agreements
- Payday loans
However, not every lender will cover every type of debt, so you need to check their terms. If you’re consolidating debt with a secured loan, your mortgage can’t usually be included as part of the debt consolidation process unless you’re refinancing your mortgage entirely.
You can also use balance transfer credit cards to consolidate credit card debt. These cards often offer 0% interest for an introductory period. But they usually charge a transfer fee, and the interest rate jumps significantly once the offer ends. If you go down this route, make a plan to pay off the balance before the interest kicks in.
Risks of consolidating debt
Borrowing to consolidate debt isn’t always a clean slate. It’s a reshuffle, and it comes with risks.
- Borrowing too much: If you borrow more than you need, this may defeat the purpose of consolidation and can put you in a deeper hole.
- Extended repayment term: This new loan could stretch your repayments over a longer term, making your monthly payments smaller. But you could end up paying more in interest overall, even if the rate looks reasonable.
- It’s not a fix: There are still the habits or issues that led to debt in the first place. If you continue spending more than you earn, you might find yourself with a new loan and fresh credit card balances.
Things to consider before borrowing
Before you borrow money to consolidate debt, take a close look at your finances. Write down all your current debts – how much you owe, the interest rates, and how long you’ve got left to pay them. Compare this with the terms of the consolidation loan you’re considering.
Then think carefully about the loan term. A longer term means smaller monthly payments, but more interest paid in the long run. A shorter term will cost more each month, but you’ll clear the debt faster and pay less overall.
And if you’re tempted by a secured loan, be honest about the risk. Ask yourself: could I still afford this if my income dropped, or my expenses rose?
If you’re unsure, speak to a debt adviser before taking action. Charities like StepChange and National Debtline offer free, confidential advice and can help you explore all your options, not just consolidation.
Borrow money to consolidate your debt with Evolution Money
If you want to consolidate your debts, a loan from Evolution Money could help you to gather everything into one single monthly repayment. We offer Secured Loans from £5,000 to £100,000. And we’re regulated by the Financial Conduct Authority and rated ‘Excellent’ by our customers too.
To get the ball rolling, check your eligibility with us today. If you’re a homeowner aged between 21 and 70 and live in the UK, we may be able to help you.
There are more tips and informational guides in our help and advice hub, so you can find out more about different ways to manage your finances.
Representative 28.96% APRC (Variable)
For a typical loan of £26,600 over 180 months with a variable interest rate of 19.56% per annum, your monthly repayments would be £484.00. This includes a Product Fee of £2,660.00 (10% of the loan amount) and a Lending Fee* of £763.00, bringing the total repayable amount to £87,030.00. Annual Interest Rates range between 11.7% to 46.5% (variable). Maximum 50.00% APRC. *Lending Fee varies by country: England & Wales £763, Scotland £1,051, Northern Ireland: £1,736.
Think carefully before securing debts against your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured against it. If you are 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.
