Is Debt Consolidation a Good Idea?
If you have several loans from different providers, you may be wondering: Is debt consolidation a good idea?
It’s a great question, but there isn’t a straightforward answer. That’s because what’s ‘good’ for you will depend on your individual circumstances.
In this guide, we’ll give you the information you need to decide whether a debt consolidation loan could help you manage your existing debt. We’ll explain:
- The potential benefits of debt consolidation loans
- The potential drawbacks of debt consolidation loans
- The alternatives to debt consolidation
Taking out any type of loan is a big decision. If you’re looking for further guidance, check out our Help & Advice section. Alternatively, give us a call on 0161 814 9158.
What is debt consolidation?
Debt consolidation is when you combine multiple debts into a single loan. This means you’ll make just one monthly payment to one provider, instead of managing several repayments.
Typically, this is done through a debt consolidation loan. You use the loan to pay off your existing debts, leaving you with just one balance to repay.
This may make your finances feel more manageable. But it doesn’t reduce the amount you owe. Instead, it restructures how you repay it.
How does a debt consolidation loan work?
A debt consolidation loan brings your existing borrowing into one place. Once approved, the funds are used to clear your outstanding debts. You then repay the new loan over an agreed term, with a monthly payment.
Many debt consolidation loans are secured loans. This means your home will be used as security. These types of loans carry additional risk, as the lender has the right to take possession of your home if you don’t keep up with repayments.
See our guide on how to consolidate debt for more information.
What are the potential benefits of debt consolidation?
Debt consolidation may offer several advantages, depending on your situation.
1. Simpler monthly payments
Some people find managing multiple payment dates, amounts and providers difficult. By consolidating your debts, you only have one monthly payment to keep track of. This may reduce the risk of missed payments and could make budgeting easier.
2. Improved cash flow
In some cases, a consolidation loan may offer a lower monthly repayment than the combined total of your existing debts. This could free up some breathing room for your budget.
However, this is often achieved by extending the repayment term. That means you could end up paying more interest overall.
3. Potentially lower interest rates
Some debts are high interest. Consolidating these into a loan with a lower interest rate could reduce the overall cost of borrowing.
This isn’t guaranteed, though. The rate you’re offered will depend on your individual circumstances. See our guide on how interest rates work for more information.
4. A clearer repayment plan
With multiple debts, it’s sometimes difficult to see when you’ll be debt free. A consolidation loan gives you a defined repayment term. This could make it easier to plan ahead and stay focused on clearing your balance.
What are the potential drawbacks of debt consolidation?
While it could be beneficial, debt consolidation isn’t without its risks.
1. You could pay more over time
Lower monthly repayments may be appealing. But they often come with longer repayment terms. This means you may pay more in interest overall, even if your monthly costs are reduced.
2. Risk of increased debt
Consolidating your debts doesn’t remove them. It’s simply a way to reorganise them.
If you continue to use credit after consolidating, you could end up in a worse financial position than before. It’s important to address the underlying spending habits that led to the debt in the first place.
3. Fees and charges
Some loans come with arrangement fees, early repayment charges or other costs. These could add to the overall cost of borrowing. Make sure you check the terms carefully before committing.
4. Secured loans carry risk
Some debt consolidation loans are secured against your home. This means if you fall behind on repayments, your property could be at risk of repossession. It’s essential to consider this carefully before proceeding.
5. Not everyone will qualify
Approval for a debt consolidation loan isn’t guaranteed. Lenders will assess your financial situation, including your income, credit history and existing commitments. If you have a poor credit score, you may be offered higher interest rates or be declined altogether.
So, is debt consolidation a good idea for you?
In summary, whether debt consolidation is a ‘good idea’ depends on your individual circumstances. It’s up to you to make a decision about how to manage your finances and whether it’s likely to benefit you in the long run.
It might be suitable for you if:
- You’re struggling to keep track of multiple payments
- You could secure a lower interest rate than your current debts
- You’re committed to not taking on additional borrowing
- You want a clear and structured repayment plan
It might not be the best option if:
- You’re likely to continue using credit after consolidating
- The new loan would significantly extend your repayment term
- The fees outweigh the potential savings
- You haven’t fully considered the risks of securing a loan against your home
There are several impartial organisations that are able to provide you with debt advice should you need it, including MoneyHelper, StepChange and National Debtline.
What are the alternatives to debt consolidation?
If you’re struggling with debt management, it’s important to understand that consolidation isn’t your only option.
Some alternatives you may want to consider include:
- Budgeting and financial planning: Creating a realistic budget may help you to repay your debts more effectively without taking out a new loan.
- Debt management plans (DMPs): These allow you to make reduced payments to your creditors through a third party provider. They could make your debt more manageable, but it may impact your credit score and extend the repayment period.
- Balance transfer credit cards: If you have credit card debt, a balance transfer card with a 0% introductory rate could help you save on interest. However, these offers are usually temporary, and fees may apply.
- Negotiating with lenders: In some cases, your existing lenders may be willing to offer support. This could potentially include reduced payments or temporary relief. It’s worth contacting them if you’re struggling to keep up with repayments.
- Debt advice services: Free, independent advice services can help you explore your options. Visit MoneyHelper, StepChange or National Debtline for more information.
Consider consolidating your debts with Evolution Money
If you think a debt consolidation loan could help you manage your finances more effectively, check your eligibility today.
At Evolution Money, we offer secured loans from £5,000 to £105,000 to UK homeowners aged 21 to 70. Take a look at our reviews on Feefo, where we’re rated ‘Exceptional’ for our service.
All loans are subject to status and eligibility. Available to UK homeowners aged 21 or over. Terms and conditions apply. Not all applicants will be accepted.
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.
Don’t rush into securing a loan against your home. Falling behind on mortgage or secured loan repayments may put your home at risk of repossession.
Representative 17.46% APRC (Variable)
For a typical loan of £23,120 over 120 months with a variable interest rate of 17.46% per annum, your monthly repayments would be £442.07. This includes a Product Fee of £2,312.00 (10% of the loan amount) and a Lending Fee* of £763.00, bringing the total repayable amount to £53,047.80. Annual Interest Rates range between 8.6% to 27.87% (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. 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.
