Last updated: 23/07/2020 | Estimated Reading Time: 2 minutes
Debt consolidation loans
If you’ve got multiple debts that you are currently paying off then you might want to consider taking out a debt consolidation loan in order to simplify, and in some cases reduce, repayments.
We’ll explain exactly what debt consolidation loans are, how they work and whether or not taking one out is the best solution for you over the course of this article.
In This Guide:
- What is debt consolidation and how does it work?
- Is debt consolidation right for me?
- How do I get a debt consolidation loan?
What is debt consolidation and how does it work?
As the name suggests, debt consolidation loans allow you to consolidate all of your existing debt repayments into one monthly payment plan, often at a reduced rate with a longer term.
The idea is that you take out one loan worth more than the sum of all of your existing loans, and then pay that off, using the money borrowed to pay off the previous debt.
You will often be able to opt for a reduced monthly payment plan, though doing so will mean that you ultimately pay more than you would otherwise due to interest accrued.
Is debt consolidation right for me?
The main advantage of a debt consolidation loan is the convenience it affords you. Only having one monthly payment to meet means that you’re not juggling debt with various creditors and getting lost in a mountain of paperwork.
You could have the option of taking out a loan involves you paying less each month than you were before which, if short term finances are an issue, could be of great help for you. Importantly, though, you won't ever decrease the total value of your debt - you might simply be able to either reduce the interest you're paying, or extend your payment period. A lot of this will depend on your credit rating though - always check the small print of any debt consolidation loan you see advertised in order to make sure you're getting the benefits you need.
It is important to note that if you do opt for a reduced payment plan, then you will end up paying back more overall due to the extra interest you’ll have to pay over the course of the extended term.
Depending on your credit rating, then you might find that the debt consolidation loan you apply for comes with sometimes prohibitively high interest rates.
It is also important that you remember that a debt consolidation loan is not a straightforward solution to your debt troubles, rather it is simply a way of simplifying the repayment process.
How do I get a debt consolidation loan?
If you want to take out a debt consolidation loan then all you need to do is find a lender willing to let you borrow an amount large enough to cover your existing debts. This may be a bank or building society, but there are also specialised debt consolidation firms that you can contact who offer specialised services.