Things to know before taking out a debt consolidation loan
Depending on your personal circumstances, a debt consolidation loan could be a good way to lower interest and reduce your monthly repayments. Always seek financial advice if you’re unsure whether a financial product is right for you.
What are debt consolidation loans?
If you owe money to several different lenders, a debt consolidation loan from a new lender could help you streamline your payments. The idea is that you use the money from your new loan to pay off all existing debts. You’ll then have just one monthly payment to keep up with, ideally with a lower interest rate than what you were paying previously.
Debt consolidation is different to debt management, which is where you look into affordable repayments with your lender (often with the help of a debt management plan provider).
Should I get a debt consolidation loan?
You could consider a debt consolidation loan if:
- You owe money to several different lenders
- You want to reduce the interest you’re paying on your debt (although you may pay interest over a longer period of time)
- You want to pay back your debt over a longer period of time
- You have a good credit rating
- You are confident you’ll be able to afford the monthly repayments on your new loan
If all of these don’t apply to you, a debt consolidation loan may not be right for you. Always seek financial advice if you're not sure.
Applying with a poor credit rating
If you have a poor credit rating, you may not be eligible for certain debt consolidation loans.
In some instances, the lender will give you the loan but will charge a much higher rate of interest. In other instances, the lender may only be willing to offer a secured loan, which means your assets may be repossessed if you don’t keep up with payments.
Early repayment fees
Your existing debt may come with small print about “early repayment”. Lenders will often charge a fee if borrowers repay their debt before the agreed repayment period ends. This is because the lender will be losing out on any interest that would have accrued during that time.
Before you commit to a debt consolidation loan, make sure you check the agreements you have with your current lenders. It may be that the cost of early repayment fees is too high to make debt consolidation worthwhile.
Choosing the right debt consolidation loan
If you want to consolidate debts efficiently you could look for a loan that has a lower interest rate than your existing credit agreements.
When you apply for your loan, choose a repayment plan that offers affordable monthly payments but won’t have you tied down for years and years. Remember the longer the loan term, the more interest you will pay.
What to do before you take out your loan
Before making the commitment to a new loan, do the following:
- Check all current credit agreements for early repayment fees
- Create a budget with your income and outgoings, to make sure you’ll be able to keep up with monthly repayments.
- Speak to an expert if you aren’t sure you’re making the right decision – StepChange Debt Charity offers free and impartial advice on debt.
Once you’ve taken out your loan, you should try to avoid borrowing more money from new lenders, as this will take away all the benefits of consolidating your debt.
The content on this page aims to offer an informative introduction to the subject matter but does not constitute expert financial advice specific to your own situation. All facts and figures were correct at time of publication and were compiled using a range of sources.