Debt Consolidation Loan Questions and Answers | evening standard

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The debt consolidation loan combines all your debts into one personal loan, which usually saves you money on interest charges.

This type of loan also simplifies your repayment schedule since you will only have to make one loan repayment per month.

Here’s how debt consolidation works and when you should consider it.

What is a debt consolidation loan?

A debt consolidation loan is a type of personal loan taken out to pay off other debts.

Money from a debt consolidation loan can be used to pay off credit cards, store cards, payday loans, buy it now offers and overdrafts. It can also be used to pay off debts to utility companies or council tax, debt collectors and bailiffs.

The idea behind debt consolidation loans is twofold:

  • By merging all your debts into one loan, you only have to make one payment per month.
  • To reduce the overall interest rate you pay – saving you money.

The rule of thumb in debt consolidation is to be disciplined enough not to go back to borrowing on credit cards, overdrafts and the like – that would defeat the purpose of the debt consolidation loan.

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How do debt consolidation loans work?

You have to do a lot of legwork when you take out a debt consolidation loan – paying off your other debts isn’t automatic.

To get started, figure out how much you need to borrow. You can do this by adding up the amount you owe, including any penalty charges for prepaying your debts.

Then you need to apply for a debt consolidation loan with the loan amount covering what you owe. When the loan is approved, the lender will pay the money into your bank account.

You then have to manually use that money to pay off your other loans.

Finally, you will have to repay your debt consolidation loan as agreed with the new lender.

How does a debt consolidation loan save me money?

Other types of borrowing such as credit cards, store card financing, buy it now and pay later programs, payday loans, overdrafts, and some personal loans may have lower interest rates. high interest.

Overdrafts, for example, typically have an APR of around 40%, while most credit cards charge around 18% APR.

Debt consolidation loans generally offer competitive interest rates compared to other forms of borrowing. So, by swapping a range of expensive debts for a debt consolidation loan, you reduce the total amount of interest you pay.

Interest rates are also usually fixed, which ensures that your monthly repayments will not increase during the agreed term of the loan.

Is a debt consolidation loan secured or unsecured?

Debt consolidation loans can be secured or unsecured. But unsecured debt consolidation loans are almost always your best bet. They can save you money and you won’t need to put up your house (or anything else) as collateral to get one.

If you’re a homeowner but have bad credit, a secured debt consolidation loan might be your only option. But err on the side of caution – you will need to pledge your property as collateral for the loan. If you are in default, your home could be at risk of repossession.

How long can I borrow with a debt consolidation loan?

Unsecured debt consolidation loans are normally available with repayment terms ranging from one year up to seven years.

However, secured debt consolidation loans can last up to 25 years.

The longer the term of your debt consolidation loan, the more interest you will pay overall. But a shorter term will mean higher monthly payments.

What interest rate will I pay on a debt consolidation loan?

The amount of interest you will pay on a debt consolidation loan depends on:

  • how much do you borrow
  • repayment term
  • your credit rating
  • the lender and the deal

Debt consolidation loans usually come with graduated interest rates. This means that interest rates are normally higher for small amounts than for large amounts. The lowest interest rates are usually available to people borrowing £7,500 or more.

Be aware that you may not get the advertised APR when applying for a debt consolidation loan. Lenders only have to give their overall rate to 51% of successful applicants.

How much debt can you consolidate?

An unsecured debt consolidation loan is essentially just a personal loan – so the maximum loan amount will depend on the lender and your personal circumstances.

Unsecured loans normally go up to £25,000 or £30,000 in some cases. You may be able to borrow more on a secured loan.

Will a debt consolidation loan impact my credit rating?

A debt consolidation has the potential to improve or hurt your credit score.

If you repay your loans on time, your credit score will improve. But not tracking refunds will negatively impact your score.

When you pay off your other debts, you must close these accounts so that this credit is no longer available to you. Having too much available credit can have a negative effect on your credit score.

How much interest will I pay?

The cheapest debt consolidation loans start at around 3% APR (fixed).

If you are borrowing less than around £5,000 the interest rate may be higher than that.

You will also be charged more if you have a bad credit score – up to 99% in some cases.

Be sure to shop around before applying for a debt consolidation loan. Using a loan eligibility checker can help you find out which loans you are likely to be accepted for.

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Is a debt consolidation loan a good idea?

A debt consolidation loan could help you sort out your finances if you:

  • struggle to keep up with multiple payments each month
  • having debts with high interest rates
  • don’t know which debts to prioritize
  • will be disciplined enough to repay the debt consolidation loan
  • will save money overall
  • will not be tempted to borrow money elsewhere
  • can afford the monthly debt consolidation loan repayments

What are the alternatives to the debt consolidation loan?

If the debts you want to pay off are on one or more credit cards, a 0% interest balance transfer card might be a good alternative to a debt consolidation loan.

A 0% balance transfer card allows you to transfer existing credit card debt to a new credit card that charges 0% interest for a fixed term, usually up to two years. Most balance transfer cards charge a balance transfer fee expressed as a percentage of the amount transferred.

A money transfer credit card lets you transfer money to your checking account to pay off overdrafts, loans, and other debts. Then you pay off the debt at 0% interest for a set period of time.

Almost all money transfer cards charge a money transfer fee, expressed as a percentage of the amount transferred.

  • Remortgage to free up equity

If you own your home and its value has increased, you may be able to remortgage a larger amount to free up the equity. You can then use the equity to pay off your debts.

Compare personal loans from the best lenders

Check your eligibility for a range of loans, without affecting your credit score.

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