A debt consolidation loan could help you reduce your monthly repayments and/or reduce the amount of interest you will pay and give you more control over your finances. It may not be the best option for everyone, however, so it is important to be aware of what debt consolidation involves and whether it is the right fit for your financial situation.
What is a debt consolidation loan?
A debt consolidation loan gives you the option to bring all existing debts into a single loan. Rather than making a number of payments to each individual creditor each month, instead you make a single monthly payment to reduce your debt.
If you have outstanding debts with a number of creditors, a debt consolidation loan could make it easier to manage your monthly repayments. Before applying for this type of loan you must ensure it is the right fit for you and your current financial circumstances.
How does a debt consolidation loan work?
The best way to understand how debt consolidation works may be to look at an example:
You have a total debt of £10,000 over 3 existing personal loans with different APR’s and different terms as shown below:
| Loan 1 | Loan 2 | Loan 3 | |
|---|---|---|---|
| Amount owed | £5,000 | £3,000 | £2,000 |
| Remaining repayment term | 36 months | 18 months | 12 months |
| APR% | 79.5% | 79.9% | 59.7% |
| Monthly Repayment | £302.01 | £256.95 | £212.83 |
| Total to repay | £10,872.37 | £4,625.02 | £2,554.01 |
| Interest paid | £5,872.37 | £1,625.02 | £554.01 |
If you kept repaying these loans without borrowing any additional money, you could be debt free in 3 years and would have paid a total of £8,051.40 in interest.
However, if you chose to take out a single loan for repay the £10,000 owed over 3 years at an APR of 49.9%, you would only repay £7,566.37 in interest. What’s more, your monthly repayments would drop from £771.79 to £487.95.
It’s important you carefully review the monthly repayments and the total interest you will pay before committing to a debt consolidation loan to ensure that it will leave you in a better financial position. You should also be sure to check any early repayment fees on existing debts and factor these into your calculations and your ultimate decision.
How much am I am able to borrow?
We can help you find a loan up to a maximum of £10,000, providing you meet the criteria of the individual lenders on our panel, with repayment terms ranging between 3 to 60 months (depending on the amount requested). The amount you will be offered will depend on your credit history and other factors determined by the individual lender.
What are the benefits of debt consolidation?
As highlighted above, a key benefit could be that you lower your monthly repayments. A debt consolidation loan may also be able to help by:
Improving your credit rating: Repaying the loan on time every month could have a positive effect on your credit score. As long as you do not build up any more credit you stand a better chance of improving your score which could make it easier to secure further credit later on.
Pay less interest: If your current loans have high APRs you may be able to reduce the amount of interest you repay each month with a debt consolidation loan. While you will still have to pay interest on your consolidated loan, it could be lower than the amount you currently pay.
What are the risks of taking out a debt consolidation loan?
Before you agree to a consolidated debt agreement you should make sure you are able to repay the monthly instalments. Take time to look at your own monthly income and outgoings and check you can comfortably afford the repayments without leaving yourself short of money.
There is a chance that taking out a debt consolidation loan could mean it takes longer to pay off your outstanding debt. However, this could make the repayments more affordable and prevent your credit score from being negatively affected.
What should you consider before consolidating your debt?
Before you take out a loan to consolidate your debt you should think about:
- Whether it is the right option for you based on your current financial circumstances. Debt consolidation may not be suitable, depending on how much you owe and the current rate of interest you pay.
- Consolidating your loan requires a long-term commitment so you must ensure you are able to afford the repayments. Missing a payment could have a negative impact on your credit score.
- The APR of the consolidation loan should not be higher than the combined APR of your current debts, as otherwise this will make it more expensive and not beneficial to you, especially if the repayment term is longer. Therefore, you should carefully calculate whether consolidating will place you in a better position financially.
- When you consolidate your debt it could mean that you are repaying the debt over a longer period than the original terms. It could also require you to pay more interest over the course of the loan agreement.
Should I take out a debt consolidation loan?
If you are finding it difficult to keep on top of a number of debts you are repaying each month, a debt consolidation loan might be able to help you get back on track.
It could work as an alternative to keeping a record of how much you need to pay each month and when it needs to paid, which can prove difficult and stressful at times. Instead, you pay a fixed monthly amount to a single lender so you always know where you stand with your debts.
A debt consolidation loan will still require you to pay additional interest and the full amount has to be repaid as with any other type of loan. However, if the loan repayment period is spread across a longer period you could benefit by paying a lower amount each month. If the term of your borrowing is extended this could increase the total amount of interest you pay, take this into consideration before consolidating your debts.
Will I need to undergo a credit check?
When you start the application process with CashLady the first stage will not have any effect on your credit rating. Our service is completely free of charge and we simply use your information to find the best possible match with a lender most likely to offer you a loan. This initial check will not change your credit score so you can start your application without fear of it having a negative impact.
If you are provisionally accepted by one of our lenders we will direct you to their website to continue the application directly. They may ask for additional information to support your application and will carry out a full credit check before making a final decision. Always be sure to read any agreement details in full before signing and ensure you are comfortable with the repayment terms.
What other checks will the lender carry out?
In addition to a full credit check most lenders will also perform additional checks to ensure you are a suitable fit.
Affordability: This involves checking that you have sufficient funds available each month to repay the loan. They will ask for information about your monthly income and outgoings.
Employment: Lenders will want to see that you are either working part or full-time and receiving a minimum amount of money each month. This may require you to submit employer details and recent wage slips.
How do I apply for a debt consolidation loan?
After submitting your application we put you in touch with a variety of lenders based on the information provided on your application form. We work with a panel of established lenders who are all FCA authorised and regulated so your information and details remain completely safe.
To start the application you just need to complete the form on our website. We’ll ask you some simple questions about yourself and income, including how much you earn and what you spend each month. The more information you can provide, the more accurate our search will be.
This part of the process will not affect your credit score. It can only be seen by the lenders reviewing your application and will not influence any future applications for credit.
After you submit the form we then share it with our lending panel. They will decide if they want to continue your application, and if so, we’ll guide you to the lender’s site where you can complete the final part of the application. This includes a full credit check before agreeing to offer you a loan to ensure you are able to comfortably able to repay the full loan in the agreed time.
