If you find your debts spiralling out of control, debt consolidation can help you better manage your outgoings. Debt consolidation involves taking out a one single loan, for the sole purpose of paying off all your other debts.
One of the key benefits of debt consolidation is that it allows you to bring together, or consolidate, all your other debts into one manageable monthly debt. This would usually have more favourable terms than the combination of your other debts, such as a lower interest rate and a lower overall monthly payment.
Debt consolidation is a tool often used to bring together various kinds of debt, such as student loan debt, credit card debt, bank loans, and other liabilities. If you find it difficult to keep track of your outgoings and are concerned about the interest and size of your payments, you may want to consider debt consolidation.
It is important to be aware 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 would prefer debt relief, then you may want to look into other options to help you manage your debts, such as an IVA, Debt Management Plan or Bankruptcy.
What Are the Risks of Debt Consolidation?
However, debt consolidation is not a solution for everyone, and its suitability will depend on your circumstances. Therefore it is vital to check all the options available to you before making a decision.
Debt consolidation may sound promising, but it could worsen your situation, especially if you have a poor credit history. This is because your credit rating and history will affect the amount you can borrow and the amount of interest charged . Debt consolidation can also involve extra costs, which need to be taken into account. Therefore, it is essential to seek expert guidance before making any decision.
Will debt consolidation be worth it for you? It often appears to be the perfect solution, and while it is helpful for many, you need to be realistic about the implications of taking out a debt consolidation loan:
- All your debts will be consolidated into one place, but you must stop all spending on 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 your credit cards – so it’s vital that you don’t start using them again as it will only make matters worse, and you will have the consolidation loan repayments as well as your credit card payments to make.
- Lower monthly payments help to improve your monthly outgoings, but it can also mean your debts will take longer to pay off.
- Even though you may have a lower interest rate for your loan, you may pay higher interest overall due to the consolidated loan taking longer to finish.
Therefore, like any financial product, there are benefits and risks to debt consolidation loans. Depending on your situation, this type of loan may be helpful, but it is best to do some research and get some expert guidance before making any commitment.
Can Debt Consolidation Loans Hurt Your Credit Score?
A well-managed loan will not negatively affect your credit score. But there are a few things to keep in mind. Firstly, as with any credit application, your lender will perform a hard inquiry on your credit report. Usually, this only knocks 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, so as long as you keep up with your payments, your credit score will be unaffected. However, if you miss a monthly payment, that will be recorded in your credit history. Therefore, we recommend you research how a consolidated loan will impact your monthly payments before you commit.
Can I Get a Debt Consolidation Loan with a Low Credit Score?
You may still be offered debt consolidation loans. But if you have a poor credit history, for example, missed payments, defaults, Country Court Judgements (CCJs), a previous insolvency or bankruptcy, then your debt consolidation loan offers will likely come with higher interest rates.
What is important is deciding whether the monthly payment even with that interest rate is more manageable than the total payments you are already making each month. Make sure you consider all aspects of the loan, such as the standard monthly payments, loan flexibility, the ability to pay the loan early etc.
How Long Does Debt Consolidation Stay on Your Credit Report?
Because debt consolidation works like a regular loan, it will not negatively mark your credit history. It is different from a credit settlement, where you agree to pay back a reduced amount of your debts.
For this reason, once your other debts are settled this will positively impact your credit score and as you gradually pay off your debt consolidation loan, your credit score will slowly increase. After completing your payments on your debt consolidation loan, your credit score will almost certainly be in better shape, and your credit history will have improved thanks to clearing the loans with the previous lenders. You just need to make sure you are able to meet the consolidation loan repayments as any missed payment will almost certainly be marked as a default by your credit provider on your credit file.
Can Debt Consolidation Affect My Chances of Buying a House?
The loan itself will not affect your chances of getting a house. In fact, if done correctly, it may help your chances of getting a mortgage by improving your credit score.
Because a consolidation loan simply brings together all your debts into one place, it does not negatively impact your credit score, and there is no reason for it to affect your chances of getting a home.
One of the key variables in mortgage approval is your debt-to-income ratio. If you can reduce your debt by paying it off quickly after consolidation, then 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 You Pay off a Debt Consolidation Loan Early?
Most loans have their own particular terms, so you will need to do some research. But generally, it is possible to pay your loan off at a convenient pace for you. One of the benefits of consolidated loans is that the reduced monthly payments will leave you with some money left over, which you could use to pay off your loan even faster by making overpayments.
Can You Keep Your Credit Cards after a Consolidation Loan?
Your credit card accounts will remain open after debt consolidation. Whether or not you continue to use your credit cards is a decision for you to make. Some people decide to destroy their cards to remove temptation; others store their cards away, keeping them for emergencies. One useful tip we have seen is that all but one credit card is cut up and then placed in a container of water in the freezer for emergencies – this means you really have to think about what you are using it for and it can never be an impulse purchase. Everybody has their own way of dealing with it but the point of a consolidation loan is to help you repay your debts, not free up more credit and continue the debt spiral.
You may find it helpful to speak to someone about this. Becoming financially-free involves more than just consolidating your existing debts — it requires forming 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 on your personal circumstances. Otherwise, give us a call on the number below.
Get free guidance from Debt Movement by giving us a call on 0330 380 1707.
