It can be tempting to ignore debts, especially when there seems no solution. Ignoring things increases the interest and costs of the loan. If you have multiple debts and seeking an immediate solution to them, a debt consolidation loan can help.
What is a debt consolidation loan?
A debt consolidation loan is a loan one can take to pay off existing loans in a single lump sum. You can lower interest rates and payments by merging multiple loans in the credit history.
Instead of dealing with different lenders separately, you deal with a single lender. By taking this one lump sum amount from the lender, you can clear the debts you want to. Post that, you pay the loan in simple repayments for the agreeable tenure to the lender.
There are 2 types of debt consolidation loans- Secured and unsecured loans.
SECURED LOANS: One borrows an amount by providing an asset in the form of collateral, like- a home.
UNSECURED LOANS: One can consolidate debts based on credit score as the prime affordability factor. It is a merit-based loan.
How does a Debt Consolidation Loan work?
A debt consolidation loan works two ways:
The first option is to take out a loan with the lender equally the total amount of debts you want to consolidate.
For example, if you want to consolidate £5000 of credit card debt, £7000 of payday loan debt, and £8000 of student loans, then you will apply for a £20000 debt consolidation loan. The lender pays these loans on your behalf to the respective lenders. You then deal with only the debt-consolidated lender and pay the loan amount in easy repayments.
The second option to consolidate debts is by transferring all your debts to a 0% interest balance transfer card. You can pay the outstanding balance in the promotional period. It is ideal for credit card debt consolidation.
By releasing one of the most high-interest loans through a debt consolidation loan, reduce liabilities and save money.
What debts can you consolidate for your situation?
Though you can consolidate almost any loan, it is ideal for loans that you can pay the loan repayments quickly. Here are some examples of the loan you can consolidate:
- Student loans
- Credit card loans
- Overdrafts
- Payday loans
- Outstanding utility debits
What are the Advantages and Disadvantages of Debt Consolidation loans?
Consolidating your debts can be a life-changing move, but it can also impact your finances. Undoubtedly, it helps you free up some interest and costs and helps manage finances better, but there are downsides.
Thus, it may not be a good option for everyone. Before applying, one must be familiar with the advantages and disadvantages of debt consolidation loans.
| ADVANTAGES OF DEBT CONSOLIDATION LOANS | DISADVANTAGES OF DEBT CONSOLIDATION LOANS |
| It simplifies finances by consolidating all loans into a single lump sum and dealing with a lender. | Consolidating debts for bad credit is challenging to qualify |
| It improves credit score if you pay responsibly towards the loan. | If you get the loan for a longer time, you will have to pay more interest toward the end |
| Lower your monthly payment and save money | A debt consolidation loan may include additional charges like- fees that you would have to pay |
| Save money if you qualify for better interest rates | A secured debt consolidation loan may put your assets at risk |
| Can easily pay past due balances without worries | It is also a debt that you would have to pay later in installments. However, after consolidation, management gets easier. |
| It helps you clear debts once and for all | May not cover every debt |
How Can I get debt consolidation for bad credit?
Debt consolidation can be an option for those having a low credit score or bad credit history. You can also qualify for debt consolidation loans for bad credit if:
1) Identify the total debts you want to consolidate
If you have multiple debts in your name, choose only those you can consolidate. Calculate the total cost. Can you afford the sum along with the interest rates and other fees? If not, then remove some loans and then apply. The amount you choose should always be lower than your monthly income.
2) Reveal regular proof of income
Consolidating debts at a lower credit history is cost competitive. The lenders evaluate other aspects like employment history and income to decide whether to grant the loan or not. If you have regular employment and can reveal the proof, you may get the loan at a low credit score.
The lender wishes to reduce the risk on their part and provide debt consolidation loans for bad credit only to those sharing the affordability to pay the loan with interest payments.
3) Get a guarantor on the loan
A debt consolidation loan is one of the most delicate loans for lenders. If you have some life goals you need to accomplish, debt consolidation helps. If you want to improve your chances, you can do so by having a guarantor on debt consolidation loans.
The person acting as a guarantor should have sound finances. Having a guarantor may help you get a lower-interest loan. It means low repayment of the loan.
- Check out the Secured debt consolidation loan
If there is something that cannot wait like -a wedding and you need extra cash, debt consolidation can help. Identify how much you need and provide an asset as collateral equal to the amount needed. In this way, you can get a direct loan from a lender in the UK to consolidate debts. You may fetch better interest rates and terms and lower the overall costs of the loan.
Should you consolidate your debts?
The answer depends on your circumstances. Here are some best times to apply for a debt consolidation loan :
- You have a good credit score and want to reduce debts
- Need a lump sum for a major event
- Reduce liabilities and deal with a single lender
- Need to reduce the repayments
- Fetch a lower interest rate on loans
Bottom line
While debt consolidation is a perfect option to lower repayments and interest rates, you must figure out your circumstances. You may have to deal with additional costs and fees that make the loan costlier. Identify the best for your circumstances.
Hi everyone, I am Lukas Thomas. I am a professional writer and author with having specialisation in the UK financial sector. I have more than 13 years of experience as the financial writer and hope it will continue longer. I have done my post-graduation in Masters of Business Administration (MBA) in Finance. Currently, I am performing my responsibility as a Senior Loan Expert in Fundingpeer, which is the fastest-growing online direct lending company. My job is to prepare borrower-friendly loan deals as per the company’s guidelines. I also write research-based blogs for the company’s official website. You can read them and gain knowledge on any loan product.
