If you are struggling with debts from personal loans, store and credit cards, a debt consolidation loan groups all of these debts together into one large loan, rather than several smaller ones. You then work to pay this single large debt off with regular monthly payments, making your debt easier to manage in the long-term. It is important to remember that consolidating your debts won’t remove them or mean that you have to pay back less. You will still need to make monthly payments on your large loan, but may find that your repayments are easier on your monthly outgoings.

When you take out a debt consolidation loan, you can pay the same amount of interest on all of the debt you have accrued. That said, you may have the option to spread the larger loan over a longer period, making your monthly repayments easier to make (this will however come with higher interest rates from the lender).

Whether or not to consolidate your debts is a decision that entirely depends on your personal circumstances. In some cases, the interest rate can be so high for a consolidation loan that it can actually cost a borrower far more than if they had kept several smaller loans. If however you can make the repayments on a larger debt and budget well, consolidating your debts may be a workable option. You should always carefully consider whether or not debt consolidation is right for you. Increasing your debts or being unable to pay back the monthly repayments can lead to serious money problems.

Are you thinking of consolidating your debts, but need advice? Financial Advisor UK offers a national network of fully FCA-registered and approved professionals that you can be matched with to ensure you get the best professional advice for your circumstances, along with the best deals available.

Things to consider before consolidating your debts

Before approaching a lender that can help you to consolidate your debts, you need to ask yourself a few simple and honest questions.

Can I realistically afford the new payments?

If you consolidate your debts, they will be moved into one debt all together. This debt will need to be paid back via monthly repayments. If you are unsure whether you can make these repayments, do a budget sheet, listing your outgoings and monthly income. Figure out how much money you could potentially afford to pay back to a lender per month.

Do I have a poor credit score?

If you have a poor credit score, you might not be eligible for a consolidation loan, or you could be offered one with a very high interest rate. You’ll need to decide how much extra this interest rate will mean in terms of how long it will take you to pay the loan back, and the overall loan amount.

Should I secure my debts against my home?

If you secure debts against your home, you may lose your home if you do not keep up with repayments.

Can I afford the interest rate?

A debt consolidation loan doesn’t mean that you will get a cheaper interest rate. Work out what you are currently paying, and compare this with interest rates offered on consolidation loans.

Can I afford the fees to move my debts?

The debts you currently have may have terms and conditions stating that you will need to pay charges if you decide to move them to another broker. Check the small print you have agreed to and decide whether the switch is worth it.

Should I take out a debt consolidation loan?

You should think about consolidating your debts if you are sure that you can keep up with the monthly repayments of a consolidation loan, and that your payments will not affect your savings due to fees and charges. If you like the idea of using the loan to give yourself a chance to save and get your finances back on track, consolidation is for you. It is especially worth doing if the interest level is lower than what you were paying before on various smaller loans.

If you can’t afford to make repayments on a consolidation loan, keep spending on things like credit cards and can’t clear all of your debts with a consolidation loan, it may be worth speaking to a debt advisor who can help you and arrange a repayment plan based on your circumstances.

Types of debt consolidation loans

There are two different types of consolidation loan – these are secured loans and unsecured loans.
Secured debt consolidation loans involve the lender securing your loan against something you own (in most cases, your home). Failure to repay the loan means that the lender can get back the costs owed by taking what your loan is secured against and selling it. Secured loans generally have lower interest rates because there is a reduced risk to the lender, and more of an incentive to the borrower to pay back the loan.

Unsecured debt consolidation loans are loans that are not secured by anything (such as your home or assets). The lender uses your credit report and credit score to determine the risk of letting you have the loan. If you fail to repay the money back, your credit score could be greatly impacted.

Top tips for taking out debt consolidation loans

• Research the market to find the best loan, interest rate and deal that works for your circumstances.
• Seek financial advice about your debts before taking out any loan.
• Look beyond the initial interest rate being advertised. Check for additional costs such as arrangement fees, as well as the annual percentage rate (APR).
• Get a trusted family member to help you keep a budget of your incomings and outgoings.
• Destroy your credit cards to prevent you from creating further debt.

Financial Advisor UK offers a national network of fully FCA-registered and approved debt advice professionals. Get instantly matched with a debt advisor to suit your circumstances.