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When To Use A Debt Consolidation Loan

When To Use A Debt Consolidation Loan

Secured Loans > Our Loans > Bad Credit Debt Consolidation Loans > When to use a debt consolidation loan

If you have several debts with different providers and struggle to manage numerous payments and due dates then it may be the right time to use a debt consolidation loan to combine your debts in to one monthly payment.

How Does A Debt Consolidation Loan Work?

A debt consolidation loan involves merging your debts from numerous sources to one monthly payment, so you will have just one debt with one lender. This form of debt consolidation works by using a loan to pay off outstanding debts and your monthly payment will then go toward paying off the single loan. This can be beneficial for people who have previously struggled with keeping up with their outgoing debts due to different repayment dates and interest rates as well as varied minimum payment amounts. By dealing with these complications and introducing one monthly repayment you could reduce the risk of missed payments.

What are the advantages of using a Debt Consolidation Loan?

  • One advantage of using a debt consolidation loan is the reduced admin for the customer. One source of debt rather than several should result in less paperwork or online forms and confirmation for you to deal with. This may help with keeping on top of your finances and make budgeting monthly that much easier.
  • You may also be able to reduce your monthly repayments to a more manageable amount by spreading the payment terms of your debt. Although this may be achieved by increasing the term of your loan which may then increase the total amount payable.
  • If you are using a debt consolidation loan to pay off other sources of finance that have a high rate of interest, such as some credit cards then you may benefit from an overall lower interest rate on your debt consolidation loan. This could potentially save you money in the long-term.
  • Using a debt consolidation loan could also potentially improve your personal credit score if you are able to make the monthly payments on time. Missed debt repayments can have a negative impact on an individual’s credit score and make it more difficult to secure finance from other sources in the future. So, if you are able to pay off the consolidation loan without engaging in further debt, your credit rating may improve.
  • One monthly repayment could help you to avoid late payment charges. Missing payments are more likely to occur when juggling a number of different payment dates, so having just one due date could also save you money, while also making it easier to manage the payments

What are the considerations of Using A Debt Consolidation Loan?

  • The purpose of a consolidation loan is to help manage multiple debts, if used effectively they can help you save money but this is not always the case. You may agree to a loan that has a higher interest rate than your previous finance agreements or a loan with a longer term. This can sometimes mean you are paying less each month over a longer term which may not save you money but will make monthly payments easier to manage.
  • The available amount on the credit cards that you may have used the loan to consolidate could now have an increased amount that is available to use again. To consolidate your debts successfully, you should try to avoid temptation and not use credit cards or other sources whilst paying off the loan and close your accounts once debts are paid in full.
  • As with most financial services, there are usually admin or consolidation fees that may need to be paid when taking on a debt consolidation loan. It is a good idea to check with the provider. Your current sources of debt may also apply an early repayment fee so it is worth considering those costs before consolidating.
  • If you are receiving a secured loan, then you may run the risk of losing assets if you are unable to make the repayments.

Is a Debt Consolidation Loan the best option for you?

When used effectively, debt consolidation loans can be extremely helpful, although there are other alternatives to managing your debts which you may want to consider.

  • If you are in debt you may think about using your savings to make any repayments. If you do have this option it may be worth considering to avoid any negative impact on your credit score.
  • You could repay a loan debt with a money transfer which may allow you to move money from your credit card to your bank account. This can be used to pay an overdraft or loan. However, providers do charge a money transfer fee and this could be up to 4% of the transferred balance. It is possible to secure a 0% interest rate deal so you may not need to pay any extra on top of your transfers and fees until the end of the deal. If that isn’t the case, you will have to pay an APR too. Speak to creditors to change your payment due dates and set up Direct Debits.
  • Peer to Peer loans may be another option. This involves borrowing money from other people online who have invested in a lending platform. You will only need to make one monthly payment and it is possible to pay early although you may struggle to secure a peer to peer loan if your credit rating isn’t considered good. The process usually involves an application fee too.
  • A Debt Management Plan (DMP) is different from a debt consolidation loan as it does not involve borrowing any money. Instead, you pay one monthly payment and a debt relief provider handles making those payments to the necessary sources. This option will often mean your credit cards and other lines may be closed and enrolling on a DMP can also have an initial negative impact on your credit rating.

What should I do before committing to Debt Consolidation Loan?

Consolidating your debts may result in a longer repayment period which can mean you are in debt for a longer period of time. This means debt consolidation loans should not be relied on as a short-term solution for getting out of debt.

When considering the best way to manage or consolidate your debts, it is important to be aware of your credit rating and there are providers which now offer free credit checks. The main Credit Reference Agencies are Equifax, Experian and TransUnion, you should consider checking your credit score and information annually to avoid any harmful mistakes, before any applications and even after a rejection to ensure there are no errors.

Before taking on any form of debt consolidation, the lender will need to ensure that your potential monthly repayments are affordable each month. You will need to account for the interest rate and see that you do not extend the repayment period unnecessarily. A longer loan term may have its benefits in terms of lower monthly payments but only if that works for you, as it may not make financial sense to be paying off a relatively small debt for a lengthy amount of time.

Warning: Late payment can cause you serious money problems. For help, go to moneyhelper.org.uk
Representative 28.96% APRC (Variable) - For a typical loan of £20,950 over 85 months with a variable interest rate of 23.00% per annum, your monthly repayments would be £537.44. Including a Product Fee of £2,095.00 (10% of the loan amount) and a Lending Fee of £714.00, the total amount repayable is £45,682.15. Annual Interest Rates ranging from 11.7% to 46.5% (variable). Maximum 50.00% APRC. The loan must be paid back by your 70th birthday. Read more.

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.
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