Sunday, June 16, 2024

Debt consolidation: the answer to cutting your monthly loan bills?

It’s a vicious circle: multiple monthly bills and repayments mean that you’re under serious financial pressure so you panic and apply for another credit card or loan. But that just makes things more complicated – you already have a load of credit card debt and your bad credit score means that the loan has a sky-high interest rate associated to it – so you end up under even more strain. At times you may find it difficult to get in touch with a licensed money lender who can make things easy for you.

When you want to work towards being debt-free, what’s the best way to get your finances back on track? Here’s how to streamline your monthly loan repayments…

Not all loans were created equal: avoid the temptation of payday loans

We’ve all heard about payday loans – a smaller short-term loan, designed to tide you over until payday. With these loans, your expectation is that you’ll repay in full, including interest and charges, within a month (or in installments within a short period, such as three months). Payday loans appear to provide a short-term solution to debt problems but they also prove to be a long-term source of regret should you struggle to pay them off.

Jon Edward, of, explains why payday loans have earned such a treacherous reputation:

No matter how appealing they may seem – and how desperate you are for extra cash – taking out any loan which may result in your repayments totaling several times the amount that you borrowed can never be a sensible idea.

“Increased dependence on these loans can quickly see a bad financial situation become far worse and, as this happens, the threat of bankruptcy can loom large on the horizon.”

So, with payday loans off the menu, how can you get out of debt when you don’t have enough money to cover it?

Opting for a debt consolidation loan: the benefits

Multiple loan repayments – such as credit cards, standard personal loans, and payday loans – can put you and your finances under a severe amount of pressure.

By consolidating all of your high interest debt into a single, lower interest loan, you’ll:

  • pay off individual lenders in one go
  • simplify your repayments – all your debt in one place makes it easier to keep track
  • make budgeting easier – one set monthly payment keeps things predictable
  • potentially improve your credit score – provided you meet your monthly repayments
  • alleviate the pressure – when compared to the terms of, say, a payday loan

One of the main benefits is that you’re likely to reduce the overall amount of interest you pay – particularly if you’ve struggled to pay off a payday loan. This is because a lender typically offers a tiered interest rate system, meaning the more you borrow, the lower the interest rate will be set.

Debt consolidation loans – what you need to know…

As with any type of loan, it’s necessary to formally apply for a debt consolidation loan. Before making a decision your chosen lender will assess various pieces of information – including your credit report, income, debts, and any previous application data – in order to ascertain whether you meet their criteria.

Is this right for you?

  • think about the total cost of the loan over the agreed term – the new loan may have a lower interest rate than your existing credit accounts but the total may be more if you have the loan over a longer period
  • read the small print – you might accrue an admin or set-up fee for the privilege of your new loan, either from a lender or a broker
  • check whether your existing lenders might charge you an early-exit fee
  • consider that your credit score could be adversely affected – being declined can reduce your credit rating; closing credit cards or accounts prematurely can also negatively impact your score
  • only borrow what you can afford and need – don’t be tempted to apply for a larger amount to secure a more favorable interest rate

Applicants with a lower credit score may not get such a good rate and some lenders may decline you if you’re seen as a financial risk – however, in most cases it is possible to obtain a debt consolidation loan, even if you have bad credit…

Can I get a debt consolidation loan when I have bad credit?

A bad credit rating marks you out as a significant risk to lenders – the inference is that you’ve previously proved yourself to be financially unreliable. However, if you have a poor credit score but you’re a homeowner, you may still be able to consolidate your debt if you opt for a secured loan.

It’s vital that you understand the implications of a secured loan. A secured load uses the equity in an asset – for example your home – as collateral, in order to diminish the risk for the lender. Should you default on your loan repayment then, under the terms of your agreement, you may lose your asset: for example, if your future circumstances change through ill-health or redundancy, your home could be at risk.

As an alternative to a debt consolidation loan, you might also look into debt management plans, home equity loans, or balance transfers.

What happens when you secure a debt consolidation loan?

On the basis that you’re approved for your debt consolidation loan, the next step is to pay your various lenders, thus settling your accounts with them. All that is left to do is maintain your monthly repayments to your sole lender in order to clear your debts.

Dependent on your specific terms, you might wish to pay extra on your loan each month, meaning that it’ll be paid off sooner, thus saving you a wedge of interest over the original period of the loan.

Debt consolidation loans can provide a solution to the financial pressure of multiple repayments, however, it is always sensible to take expert impartial advice prior to agreeing to the terms of a new loan – visit the Money Advice Service for information on where to get free UK debt advice. 

Claire James
Claire James
Claire is an accounts manager at Fire Digital UK, an online publishing and content marketing company based in the North West.

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