As personal debt in the UK rises, more and more people are looking for help. Debt consolidation loans are among the tools rising in popularity.
What is a debt consolidation loan?
Debt consolidation loans work by borrowing money to pay off all or most of your outstanding debts. These are usually for credit cards, store cards and personal loans. Then you only owe money to the one lender. Ideally, you repay that debt at a lower cost with a monthly payment plan.
Types of consolidation loans
There are two kinds of debt consolidation loans, and it is important to know the difference between them:
- A secured debt consolidation loan: these are tied or “secured” to a valuable asset, like your home or car. If you miss payment, you risk losing that asset.
- An unsecured debt consolidation loan: these are not linked to any valuable assets.
Always seek professional advice before considering either type of debt consolidation loan. While it may seem a straightforward option, there are also hidden risks that can make either option unsuitable for you.
When should and shouldn’t you consider a debt consolidation loan?
Review your persona circumstances to know if it is a good idea to consolidate your debt with a loan.
On the one hand, a debt consolidation loan is a good idea if the savings are significant and you can afford to keep up payments. On the other, if you cannot afford to keep up with monthly loan repayments, debt consolation loans are probably too risky.
Also worth considering is your credit score. If you can keep up with the repayments on time, debt consolidation can improve your credit score. But if you are late or fall behind, your credit score will suffer.
You need to run the numbers carefully before agreeing to a consolidation loan. For example, how much money do you expect the loan to save you in the long term? And how does that compare to your interest charges on existing payments? Are you really saving less? And if there is a significant difference, can that saving be wiped out by fees and charges?
Money Dashboard can help pull your numbers. It can also help you see the realities of your financial situation such as the impact of losing a monthly paycheck due to job loss or illness. If your situation changes and you can’t make a payment, is the risk acceptable?