Debt consolidation involves taking out a single loan for the sole purpose of paying off all your other debts. If you find your debts spiralling out of control, debt consolidation can help you better manage your outgoings.
The key benefit of debt consolidation is that it allows you to bring together, or consolidate, all your other debts into one manageable monthly debt. They also usually have more favourable terms than the combination of your individual debts, such as a lower interest rate and a lower total monthly payment.
Debt consolidation is often used to bring together various kinds of debt, including student loan debt, credit card debt, bank loans, and other liabilities. So, if you’re finding it difficult to keep track of your outgoings and are concerned about the size of your payments and the interest you’re paying, you may want to consider debt consolidation.
You must remember that debt consolidation loans do not erase your original debt. Debt consolidation involves transferring all of your debt to a different lender or a different type of loan. If you have a low credit rating, or you feel that debt relief would be a better option for you, you may want to look into other options, such as an IVA, a Debt Management Plan, or Bankruptcy.
What Risks are Associated with Debt Consolidation?
Debt consolidation is not the perfect solution for everyone, and its suitability will depend on your circumstances. Therefore, it is vital to find out about all the options available to you before you make a decision.
To the untrained ear, debt consolidation may sound promising, but it could worsen your situation, especially if you have a poor credit history. Your credit rating and history will affect the amount you can borrow, as well as the amount of interest charged, so you may not be able to cover all your debts or get a better rate.
There may also be extra costs involved in debt consolidation, and these need to be taken into account, so it’s essential to seek expert guidance before making any decision.
Debt consolidation often appears to be the perfect solution, and while it is helpful for many, it’s important to be realistic about the implications of taking out a debt consolidation loan.
- All your debts will be consolidated into one loan, but you must stop spending on all your other lines of credit for it to be effective. For example, consolidating all of your credit cards into a loan means you will have a £0 balance on them, so it’s vital that you don’t start using them again. Doing so will only make matters worse, because you will now have the consolidation loan repayments and your credit card payments to make.
- Lower monthly payments may help improve your monthly outgoings, but it may mean that your debts will take longer to pay off.
- Although you may have a lower interest rate on your loan, you might actually pay more interest overall, due to the consolidated loan taking longer to finish.
As with any financial product, there are benefits and risks associated with debt consolidation loans. This type of loan may be helpful to you, but it is best to do some research and get some expert guidance before making a commitment.
Will a Debt Consolidation Loan Affect My Credit Score?
If you manage your loan well, it will not negatively affect your credit score, but there are a few things to keep in mind. As with any credit application, your lender will perform a hard inquiry on your credit report. This should only knock a few points off your credit score, but the effect can be more severe if you apply to multiple lenders.
A debt consolidation loan is like any other loan; as long as you keep up with your payments, your credit score will be unaffected. However, if you miss a monthly payment, it will be recorded in your credit history. Therefore, it’s important to understand how a consolidated loan will impact your monthly payments before you commit.
Will My Low Credit Score Prevent Me from Getting a Debt Consolidation Loan?
If you have a low credit score, you may still be offered debt consolidation loans. However, if you have a poor credit history, including missed payments, defaults, County Court Judgements (CCJs), previous insolvency, or bankruptcy, then your debt consolidation loan offers will likely come with higher interest rates.
You will need to decide whether the consolidated monthly payment, even with that interest rate, is more manageable than the total payments you are already making each month. Be sure to consider all aspects of the loan, including the standard monthly payments, loan flexibility, ability to pay the loan early, etc.
Will My Debt Consolidation Loan Show on My Credit Report?
Debt consolidation works like a regular loan, so it will not negatively mark your credit history. It is not like a credit settlement, in which you agree to pay back a reduced amount on your debts.
Because of this, once your other debts have been settled, your consolidation loan will actually positively impact your credit score. As you gradually pay off your debt consolidation loan, your credit score will slowly increase.
Once you’ve completed your payments on your debt consolidation loan, your credit score will almost certainly be in better shape, as long as you have not made more debt. Your credit history will have improved, too, thanks to clearing the loans with the previous lenders.
You just need to make sure you are able to meet the consolidation loan repayments before you begin, as any missed payment will almost certainly be marked as a default by your credit provider on your credit file.
Will Debt Consolidation Prevent Me from Buying a House?
A debt consolidation loan will not lower your chances of buying a house. In fact, if managed correctly, it may increase your chances of getting a mortgage by improving your credit score.
All a consolidation loan does is bring together all your debts in one place. It does not negatively impact your credit score, and there is no reason for it to negatively affect your chances of getting home financing.
A key variable when it comes to mortgage approval is your debt-to-income ratio. If you can reduce your debt by paying it off quickly after consolidation, you will be in a stronger position when applying for a mortgage. Therefore, a debt consolidation loan can work to your advantage, but it is always best to seek expert guidance before taking out a loan.
Can I Pay Off My Debt Consolidation Loan Early?
In general, loans each have their own particular terms, so you will need to do some research. However, it is usually possible to pay your loan off at a pace that is convenient for you.
A benefit of consolidated loans is that the reduced monthly payments could leave you with some extra money after your monthly outgoings. You could use this to pay off your loan even faster by making overpayments.
Will My Credit Cards Be Cancelled If I Consolidate My Debts?
Whether or not you continue to use your credit cards is your decision, and they will not be closed when you consolidate your debts. Some people decide to destroy their cards to remove temptation; others store them away, keeping them for emergencies.
We have heard of another useful tip, which offers the best of both worlds: Aside from one, all credit cards are cut up, and the remaining one is placed in a container of water in the freezer for emergencies. This means you would really have to think about what you want to use it for, and it can never be an impulse purchase.
We all have our own way of dealing with situations like this, but the point of a consolidation loan is to help you repay your debts, not free up more credit and increase the debt spiral.
Speaking to someone about this may be useful to you. Becoming financially free involves more than just consolidating your existing debts — you need to form new habits. We would be happy to talk to you about this and provide some guidance. You can complete our Debt Movement Questionnaire for tailored advice about your personal circumstances. Otherwise, give us a call at the number below.
Get guidance from Debt Movement by giving us a call at 0333 987 0001
If you are considering a debt management solution and you’re not sure where to start, please contact our team at Debt Movement for debt guidance and solutions.
