If you have several different debts with multiple lenders, then debt consolidation may be a way to reduce your monthly payments. In this simple guide, we’ll explain what debt consolidation is and how it might be able to help you, and answer some of the common questions about this type of debt management.
What is a debt consolidation loan?
A debt consolidation loan means taking out enough money to pay off all of your existing debts. You’re then left with just one debt, meaning that you only owe money to one lender.
Who should use this type of loan?
Debt consolidation isn’t for everyone, however it can be helpful. It’s recommended for those who are struggling to keep up with their monthly payments, because the interest rate is likely to be lower. However it’s important to be aware that you still may end up paying more interest over time, as the repayment term will be longer. For this reason, it’s important to take advice before getting a consolidation loan.
Generally speaking, a debt consolidation loan is only a good idea if you’ll be able to keep up with the new monthly payment terms, and if the money that you save on interest is not cancelled out by any fees and charges.
Who can qualify?
The qualification criteria for a consolidation loan are similar to the criteria for other types of credit. You’ll need to provide proof of income, and lenders will also check your credit history and financial stability. Lenders may also be more inclined to give you a loan if you’re able to secure it against property that you own.
This means that it is less likely to be suitable for those who are struggling with more serious debt or issues such as CCJs, as your credit rating may stop you from qualifying.
Are there other more effective ways of managing debt?
There are definitely other ways of dealing with your debt, and which one is most effective for you will depend on your individual circumstances. For instance, you could also consider a debt management plan, or you could even try negotiating with your creditors.
Will it affect my credit rating?
If debt consolidation helps you to make your monthly payments in full each month, then it’s long-term impact on your credit score should be positive. However, in the short-term, it may cause your score to drop slightly. This is because one of the factors that credit companies look at is recent credit applications, which tend to cause your score to dip slightly. This shouldn’t be too much of a concern, as it will bounce back after a few months.
Are consolidation loans available for people with bad credit?
They may be available, but the interest that you’re charged is likely to be very high. This means that the loan will cost you more, and therefore it may not be the best option for your needs.
Where can I get more information?
We definitely recommend speaking to an expert before you make any decision, as you want to be sure that consolidating your debt will actually save you money.