A Guide to Debt Consolidation Loans


A debt consolidation loan is just a normal personal loan which is taken out with the intention to use the loan funds received to repay all, or some, of your existing debts.

You would then repay the debts you have cleared through the loan’s single monthly repayment. You can use the loan for any type of debts including:

• Credit card debt consolidation
• Store card debt consolidation
• Personal loan debt consolidation

Although your debts don’t reduce, consolidating them together into one personal loan should reduce your monthly outgoings and help you budget your finances, providing you can afford the debt consolidation loan repayments.

How do debt consolidation loans work?

Most debt consolidation loans are unsecured loans, so they are issued after the lender has checked your creditworthiness. Therefore, if you have a bad credit history with missed repayments, you may find it hard to obtain a debt consolidation loan in the first place.

If you see any debt consolidation loans that are secured on your home or property, you should be careful before agreeing to obtain one. With a secured loan the debt is secured (held) against an asset (usually property) – think carefully before securing other debts against your home because your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

What to consider when obtaining a debt consolidation loan

When using a loan to consolidate debts, work out how much your total debts are and try to borrow just enough to cover your existing debts. Once you have then applied for the loan and it has been approved, check the interest rate offered, as the interest rate can be tiered depending on how much you borrow and the results of your credit rating search.

Is a debt consolidation loan a good option for you?

The main advantages of a debt consolidation loan are:
• All your debts are repaid with one payment if you can obtain enough funds to consolidate all your debts with the loan.
• You therefore only have one payment to keep track of and budgeting your household income is easier.
• Your credit rating could improve if you close the credit card and loan accounts that you have consolidated.

Creditors can then see that you are managing your finances responsibly, you could see your rating go up, as long as you maintain your consolidation loan repayments.

The main disadvantages of debt consolidation loans:
• You usually will be offered a higher interest rate than what is advertised, so your monthly repayments may not be as low as you hoped when the loan is agreed.
• You could end up paying more interest than if you took advantage of introductory credit card rates on balance transfer periods.
• Some lenders charge early repayment penalties if you wish to pay off a loan before the end of its fixed term. Check your terms and conditions before signing the loan.
• You could end up paying more overall because the term of your loan could be longer.

What are my options if I have been turned down for a debt consolidation loan?

If you have been turned down for a debt consolidation loan, then its unlikely that applying with another lender will be successful. Your credit rating will have been impacted by the search and refusal from the first debt consolidation loan application, and lenders generally have similar criteria when accepting loan applications.

If you have been refused for a debt consolidation loan, then you have two options:

Continue to make the repayments on your existing debts

If you can continue to maintain the repayments on your existing debts then you can return to doing so, providing you have not defaulted on any of these debts. However, you may find that repaying all your credit card and loan debts could take an extortionate length of time to repay in full.

You should therefore consider this option carefully and ask yourself, “Is this a long term solution for dealing with my debts?”.

Seek professional advice – Contact us now on 028 9039 3626

If you find you are struggling to maintain the repayments on your existing debts then you should seek advice on what options are available to help you with your debts.

Our dedicated team of debt advisers are ready to help you deal with your debts and can talk you through all your options for free. They will provide clear advice on how you can move forward with your debt.

Our advisers are non-judgemental, and everything discussed is confidential so you can talk to us if you have a personal, health or other issue that has made it harder for you to manage your finances.

If you are based in Northern Ireland, if you prefer you can also come visit our offices in Belfast for a face-to-face meeting.

To arrange a call back with a debt adviser just click here.