Debt Consolidation Loans | Learn more about debt consolidation
By taking out another loan to pay off a number of small debts, you may be able to reduce your monthly payments and simplify your finances. We look at the pros and cons of debt consolidation loans.
What is credit consolidation?
You can use a debt consolidation loan to erase a number of small debts. Credit consolidation simply consists of consolidating your debts into a single loan, you will only have one creditor to deal with and one monthly repayment.
Debt consolidation loans can reduce the pressure you feel from creditors. Keep in mind that these loans often spread the debt over a longer period, meaning you may be in debt for many years.
Is the debt consolidation loan for me?
You should think carefully before choosing to consolidate your debt, as there may be better options available to you. Debt consolidation loans only transfer your debts, unlike bankruptcy or an Individual Voluntary Arrangement (IVA), which reduce the amount you repay.
If your existing debts carry high interest rates (for example on credit cards or store cards), you may be able to get a loan at a lower rate. If you have a high level of debt, banks can only offer you a loan with a high interest rate.
You will need strong willpower if you take out a debt consolidation loan, as the credit cards you clear with your loan will remain open (unless you close the accounts). The temptation to keep spending beyond your means can be hard to resist.
If you’ve already consolidated your debt, it’s probably not a good idea to try to consolidate your debt again.. A more formal debt solution might be more effective in helping you break the cycle of debt.
Benefits of credit consolidation?
Credit consolidation can help you:
Reduce the number of creditors you have to deal with.
Reduce the level of interest you pay (only if your bank offers you a reasonable interest rate).
Reduce your monthly debt payments to an amount you can afford.
Avoid damaging your credit rating (IVAs and bankruptcy hurt your credit rating).
Disadvantages of credit consolidation?
Debt consolidation may not be right for you because:
Your bad credit rating makes it impossible to obtain another loan.
You may need to secure the loan against your home, leaving it at risk of repossession.
You might be tempted to keep spending on your credit cards.
The interest rate on your loan may increase, further increasing the time it takes you to pay off your debts.
You can’t afford refunds.
Choose a debt consolidation loan
Borrowing more money to pay off debt is rarely a good idea. So think carefully before consolidating your debts with a new loan.
If you’re on top of your spending and want to avoid IVA and bankruptcy penalties, a debt consolidation loan might be what you need.
Before making a decision, speak to an unbiased advisor for advice on all the options available.
Alternatives to Debt Consolidation Loans
Depending on your level of debt and your situation, you may find that a Individual Voluntary Arrangement, bankruptcy or one Debt relief order is a more effective way to take control of your debt. The Consumer Credit Advice Service or Citizens Advice Bureau offers free, unbiased debt advice and will help you understand your options.
You can also consider managing your debts with a balance transfer card which could reduce interest and make repayments more manageable. Read our dedicated guide to find out if a balance transfer card is a good option for you.