What is a debt consolidation loan?
A debt consolidation loan gives you the option of consolidating all the existing debts into one loan. Rather than making a certain number of payments to each creditor each month, you instead make a single monthly payment to reduce your debt.
If you have unpaid debts from multiple creditors, a debt consolidation loan could make it easier to manage your monthly repayments. Before applying for this type of loan, you need to make sure that it is right for you and your current financial situation.
How Does a Debt Consolidation Loan Work?
The best way to understand how debt consolidation works may be to look at an example:
You have a total debt of Â£ 10,000 on 3 existing personal loans with different APRs and different terms as shown below:
|Loan 1||Loan 2||Loan 3|
|Amount||Â£ 5,000||Â£ 3,000||Â£ 2,000|
|Remaining repayment term||36 months||18 months||12 months|
|Monthly repayment||Â£ 302.01||Â£ 256.95||Â£ 212.83|
|Total to be reimbursed||Â£ 10,872.37||Â£ 4,625.02||Â£ 2,554.01|
|Interest paid||Â£ 5,872.37||Â£ 1,625.02||Â£ 554.01|
If you continued to pay off these loans without borrowing any additional money, you could be debt free in 3 years and would have paid a total of Â£ 8,051.40 in interest.
However, if you choose to take out a single loan to repay the Â£ 10,000 due over 3 years at an APR of 49.9%, you will only repay Â£ 7,566.37 in interest. In addition, your monthly payments would increase from Â£ 771.79 To Â£ 487.95.
It is important that you carefully consider the monthly repayments and the total interest you will be paying before committing to a debt consolidation loan to make sure that it will leave you in a better financial position. You should also make sure to check the prepayment charges on existing debts and factor them into your calculations and final decision.
How much can I borrow?
We can help you find a loan up to a maximum of Â£ 5,000, as long as you meet the criteria of the different lenders on our panel, with repayment terms ranging from 3 to 60 months (depending on the amount requested). The amount you will be offered will depend on your credit history and other factors as determined by the individual lender.
What Are the Benefits of Debt Consolidation?
As pointed out above, a key benefit could be that you lower your monthly repayments. A debt consolidation loan can also help you by:
Improve your credit rating: Paying off the loan on time each month could have a positive effect on your credit score. As long as you don’t accumulate more credit, you have a better chance of improving your score, which may make it easier to get additional credit down the road.
Pay less interest: If your current loans have high APRs, you may be able to reduce the amount of interest you pay off each month with a debt consolidation loan. While you will still have to pay interest on your Consolidated Loan, it could be less than the amount you are currently paying.
What are the risks of taking out a debt consolidation loan?
Before agreeing to a consolidated debt deal, you need to make sure that you are able to repay the monthly installments. Take the time to review your own monthly income and expenses and verify that you can comfortably afford the repayments without leaving yourself strapped for cash.
It is possible that taking out a debt consolidation loan will mean that it will take longer to pay off your outstanding debt. However, this could make repayments more affordable and prevent your credit score from being negatively affected.
What Should You Consider Before Consolidating Your Debt?
Before taking out a loan to consolidate your debts, you should think about:
- If this is the right option for you based on your current financial situation. Debt consolidation may not be suitable, depending on how much you owe and the current interest rate you are paying.
- Consolidating your loan requires a long-term commitment, so you need to make sure that you are able to pay the repayments. Missing a payment could have a negative impact on your credit score.
- The APR of the consolidation loan should not be higher than the combined APR of your current debts, otherwise it will make it more expensive and not beneficial for you, especially if the repayment term is longer. Therefore, you need to carefully calculate whether the consolidation will put you in a better financial position.
- When you consolidate your debt, it may mean that you are paying off the debt over a period longer than the original terms. It might also require you to pay more interest during the life of the loan agreement.
Should I Take out a Debt Consolidation Loan?
If you’re struggling to get a handle on a number of debts that you pay off each month, a debt consolidation loan could help get you back on track.
This could work as an alternative to keeping a record of how much you need to pay each month and when it needs to be paid, which can be difficult and stressful at times. Instead, you pay a fixed monthly amount to a single lender so you always know where you stand with your debts.
A debt consolidation loan will always require you to pay additional interest and the full amount will need to be repaid just like any other type of loan. However, if the loan repayment period is spread over a longer period, you might benefit by paying a lower amount each month. If the term of your loan is extended, it could increase the total amount of interest you pay, so take this into account before consolidating your debt.
Do I have to undergo a credit check?
When you start the application process with CashLady, the first step will have no effect on your credit rating. Our service is completely free and we simply use your information to find the best possible match with a lender most likely to offer you a loan. This initial check will not change your credit score, so you can start your application without worrying about it having a negative impact.
If you are provisionally accepted by one of our lenders, we will direct you to their website to continue the application directly. They may ask for additional information to support your claim and will perform a full credit check before making a final decision. Always make sure you read all the details of the agreement before signing and make sure you are comfortable with the repayment terms.
What other checks will the lender perform?
In addition to a full credit check, most lenders will also perform additional checks to ensure that you are a suitable candidate.
Affordability: This is to check that you have sufficient funds each month to repay the loan. They will ask you for information about your monthly income and expenses.
Use: Lenders will want to see that you work part time or full time and receive a minimum amount of money each month. This may require you to submit employer details and recent payslips.
How To Apply For A Debt Consolidation Loan?
After submitting your application, we connect you with a variety of lenders based on the information provided on your application form. We work with a panel of established lenders who are all licensed and regulated by the FCA to keep your information and details safe.
To start the application, you just need to fill out the form on our website. We’ll ask you a few simple questions about yourself and your income, including how much you earn and what you spend each month. The more information you provide, the more precise our research will be.
This part of the process will not affect your credit score. It can only be seen by lenders who review your application and will not influence future credit applications.
After submitting the form, we then share it with our loan panel. They will decide if they want to proceed with your application, and if so, we will guide you to the lender’s site where you can complete the final part of the application. This includes a full credit check before agreeing to offer you a loan to ensure that you are able to comfortably repay the entire loan within the agreed timeframe.