One of the major challenges of debt is working with creditors, and it can be even harder to cope if you are dealing with multiple companies at the same time. Consolidating under a single, new line of credit can help people to manage their debts but doing so does come with its own set of potential downsides.
If you think that debt consolidation could be helpful to you, keep reading to learn more and don’t forget to click through to our detailed guides.
What is debt consolidation?
Debt consolidation involves taking out a new line of credit to pay off other liabilities and credit. By taking out further credit that can be used to pay off existing creditors, you can combine your debt into a single liability – which you may find easier to manage.
How to consolidate your debts?
Debts can be consolidated by taking out a loan to pay off a wide variety of existing liabilities such as personal loans, store or credit cards, or catalogue payments. Whilst a consolidation loan will not erase what you owe, it will transfer what you owe to a different credit account with the newly borrowed funds being used to pay off existing creditors.
By managing money in this way, you can combine all of your existing debts within a single monthly repayment. This can provide a realistic and constructive way to deal with your finances, provided that you can afford to make the agreed payments.
Who is eligible?
Whether you are eligible for a debt consolidation loan will very much depend on your own financial circumstances. Your credit history and credit score will be viewed as a major deciding factor by any company to which you apply, and you have a better chance of being approved for a loan if you have a recent history of good credit.
The process of applying for a debt consolidation loan is much the same as for other forms of credit, and you will typically need to supply proof of identity, financial details and bank statements. In many cases you can make an application online, but will still be subject to a credit check.
What are the pros and cons of consolidating debt?
If you’re considering taking out a debt consolidation loan, looking at the advantages and disadvantages of this solution can help you to make a more informed decision. There are lots of factors to take into account when looking at any solution, but you can find some of the main pros and cons of debt consolidation loans listed below:
Advantages | Disadvantages |
| Debt consolidation loans can help you to simplify your financial situation by combining all unsecured credits into a single liability, with one regular repayment amount and only a single creditor to deal with. | If you can’t afford to make regular repayments towards what you owe, debt consolidation might not be the best option for you. It could, in fact, put you deeper into debt, with a higher monthly repayment figure than your other standalone liabilities. |
| Personal loans can sometimes have lower rates of interest than other kinds of debt – for instance, credit card debts. By consolidating what you owe into a single liability, you could save money on repayments. | There is no guarantee that a debt consolidation loan will come with a low rate of interest, and you may end up paying more than if you had continued to deal with your debts separately. |
| Debt consolidation loans often come with a fixed term, which can give you a clear route to repaying your debts whilst helping you to plan your finances for the future. | You could put assets such at risk if you take out a secured debt consolidation loan. With assets such as your home or vehicle acting as a guarantee for the loan, you could lose your property if you fail to keep up with repayments. |
What is the best debt consolidation company to use?
There is no one-size-fits-all debt consolidation loan available on the UK lending market, and your personal circumstances will determine which provider offers the best option for you. Remember that loan providers can still charge fees, offer varying rates of interest and each have their own conditions, restrictions and processes.
Before deciding to apply to debt consolidation loan provider, you may find it helpful to understand what the true cost of the loan will be so that you can make an informed choice.
Can I get a debt consolidation loan from the government?
Although a number of debt management companies advertise under the banner of ‘government debt consolidation’ schemes, the simple fact of the matter is that these do not exist. There is currently no such thing as a government-backed debt consolidation loan and the UK government does not endorse these schemes.
Any adverts that use these phrases are misleading, as they can lead people to believe that their services are free and official. In reality, many of the companies behind these ads will charge a substantial fee for advice and possibly offer debt consolidation loans at very high rates.
Although government debt consolidation schemes do not exist, there are a variety of debt solutions available that have been developed and introduced by the authorities. These include:
- Debt Relief Orders (DROs);
- Individual Voluntary Arrangements (IVA);
- Bankruptcy; and
- the Debt Arrangement Scheme (DAS) in Scotland.
For a more complete list of possible options, visit our Debt Solutions page HERE.
Secured and unsecured loans for consolidating debt – what’s the difference?
There are two types of debt consolidation loans that can be useful in different circumstances – secured (also known as a personal loan) and unsecured. Some of the main differences between these kinds of borrowing are the consequences for you and your finances if you are unable to make repayments.
An unsecured debt consolidation loan provides a way of taking out new credit to pay off existing borrowings, without linking any assets to what you owe. This kind of borrowing can come with high-interest rates, particularly for those who have a poor credit history. A benefit of an unsecured debt consolidation loan, however, is that if you cannot keep up with repayments the loan company cannot simply repossess your home or property.
In contrast, a secured debt consolidation loan works in much the same way as a mortgage and links the amount you borrow to pay off existing debts with your home, vehicle, or another asset. This means that if you do not keep up with repayments, the loan company can repossess and sell your property to recover what you owe. Whilst interest rates for this kind of borrowing may be lower than for unsecured loans, the consequences of failing to repay can be much more serious.
Frequently Asked Questions
What happens if you consolidate debt?
Consolidating debt means taking out a new loan to repay several existing borrowings. Rather than dealing with multiple creditors (from credit card companies to personal loan providers) you can roll what you owe into one regular repayment figure – simplifying the way that you deal with debt.
Your existing debts will not be erased or written off, but taking out a debt consolidation loan might help you to budget for the future and control your finances.
Do consolidation loans hurt your credit?
In most cases, a debt consolidation loan will not affect your credit score, provided that you keep up to date with all the necessary repayments.
Keep in mind, though, that the overall cost of a new loan can be high and missing any repayments will have an impact on your credit file and rating.
Can I get a debt consolidation loan with poor credit?
Although some providers may be willing to offer debt consolidation loans to borrowers with a poor credit history, there is no guarantee that you will be able to take out additional credit. If your recent credit history has been impacted by things such as defaults, CCJs, bankruptcy or other insolvency solutions, the chances are that any debt consolidation loan you are offered will come with a higher rate of interest.
Remember that the success of a debt consolidation loan relies on your ability to pay back what you owe, and if you are already struggling this not be a suitable solution for you.
Can I get a free debt consolidation loan?
Some providers advertise ‘free consolidation debt loans’, which naturally sound very appealing to borrowers that are trying to deal with their debts. Often in these cases, what lenders mean by ‘free’ is that you won’t have to pay any set-up fees for the loan. Even if this is the case, you will still have to pay back what you owe with interest, which can be set at a high rate.
Is it a good idea to consolidate debt?
Consolidating debt can be attractive for many different reasons, but it is not a suitable approach for everyone. Whether a debt consolidation loan would be appropriate for you will depend on your individual financial circumstances.
Knowing the options that are available to you, along with taking qualified financial advice, can help to determine which solution will be most effective for your situation.
Last Updated on August 31, 2023