How do debt consolidation loans work?
How do debt consolidation loans work?
Debt consolidation loans work like this: you take out a new loan and use the money to pay off multiple debts. You then simply pay off your new loan instead of having to make multiple payments to multiple creditors.
A debt consolidation loan allows you to take out one loan to pay off multiple debts – such as credit cards or overdrafts.
This could help you keep on top of your bills as you will only have one monthly payment to make, rather than multiple payments all due on different dates.
- Debt consolidation involves taking out a single loan to pay off multiple debts
- It may help you better manage your borrowing
- Lower interest rates mean more of your monthly payment goes toward paying off the principal
- This could help you clear your debts faster
Debt consolidation may be appealing to borrowers with bad credit. But it can be a catch-22 situation – it can be difficult getting approved for new finance if you have struggled to make payments in the past (and your credit score has been affected).
That’s when a secured loan could be a suitable option. This is where a house or asset acts as security on a loan, which reduces the risk to lenders. That reduced risk could improve your chances of getting a secured debt consolidation loan – even if you have bad credit.
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.
