A debt consolidation loan could be a great way to take control of your finances. Find out about the advantages, the disadvantages and how to apply.
Debt Consolidation Loan
A debt consolidation loan involves taking multiple debts (including credit cards, loans and overdrafts) and consolidating them into one loan to lower monthly payments and clear debt with less strain on your finances. It is worth noting that often, the lower payment is due to the debt-consolidation loan being paid off over a longer period. This may mean that it will take longer for you to clear your debt, and you may end up paying more.
Types of Debt Consolidation Loan
Before you apply for a debt consolidation loan, it is important to understand the details. There are two types of consolidation loans:
Often referred to as a Homeowner Loan, the secured loan is borrowed against assets such as your home. This may be suitable for you if you have enough equity in your home.
A loan that is not borrowed against any assets.
Can I Apply for a Debt Consolidation Loan?
If you have a good credit rating, steady income and can commit to the long-term payments of a debt consolidation loan, then you can apply for one. However, it is certainly best to seek professional advice before applying, as being refused a loan can negatively affect your credit score.
The process of applying for a debt consolidation loan is simple (although each loan process will vary). Upon applying for the loan, you may need to provide proof of income, and your credit score will be checked. If you are approved, you will receive the loan and should use this to pay off your existing debt and close your accounts. You will then only have one creditor, which you will repay until your debt is entirely paid off, leaving you debt-free.
Are Debt-Consolidation Services Right for Me?
There are both positive and negative aspects of getting a debt consolidation loan.
The Advantages of Debt Consolidation
- It may reduce the overall debt repayment.
- It may lower your monthly payment.
- All of your current debt will be put into one convenient monthly payment.
- It will not be recorded on a public insolvency register.
- As long as you keep up the monthly repayments, a debt-consolidation loan can improve your credit score.
The Disadvantages of Debt Consolidation
- The consolidation loan may carry a higher interest rate.
- It may be more expensive to pay off in the long run due to a longer payment period.
- If you don’t keep up with repayments, the loan provider can take action against you.
- If you choose a secured loan, your home could be at risk if you do not keep up with your repayments.
- Your debts must be paid in full as there is no debt forgiveness.