Debt’s a heavy burden to bear and when you’ve got several different loans, each with higher interest rates than the last, it can feel overwhelming.
This is especially true for anyone with a less-than-ideal credit rating, as banks freezing you out and refusing to give you better terms on your loan can make you feel like you’re in a seemingly never-ending cycle of debt. Still, there’s hope yet — debt consolidation loans.
These loans are designed to move all the debt you have from your various different credit accounts into the same account. The idea here is that by consolidating your debt into one, simple to manage, loan with much lower interest rates, you’ll have an easier time managing your payments and improving your credit score.
Assessing your debt
Debt consolidation loans can help in some cases but there are a few things you should keep in mind before diving straight into them.
Evaluate your debt status
It’s crucial to be organised and aware of all the different types of debt you have before moving forward.
Firstly, it’s important to understand a few of the basics — how many alternative types of loans have you actually taken out? How much money did you lend each time? What were the interest rates for all your different loans?
Make sure you’re putting together some kind of folder with all your recent statements and creating a list of your debts.
Furthermore, by having a thorough list of all your different debts, you’ll have a much clearer understanding of your total debt load.
When you’re armed with this knowledge, determining whether consolidation is right for you is a lot more straightforward.
Why this step is important
Essentially, it’s incredibly difficult to make any forward progress without previously having a well established strategy in mind for getting out of debt.
Although it can be a massive help for some people, consolidation isn’t always the right solution for everyone. In fact, if you’re not careful, it’s actually possible to make your debt problem worse by entering secured debt consolidation loans.
By not having an accurate assessment of where you currently stand, it’s entirely possible you can end up choosing the wrong type of loan, which just leads to more debt and higher interest charges.
Think of it this way — suppose you have a few different high-interest credit cards with fairly diverse balances, around £1000 – £5000. In this case, it would be wise to consolidate them through a personal loan or balance transfer.
Balance transfer credit cards let you take advantage of a 0% introductory APR period, meaning you can reduce the amount of high-interest accounts you have while simplifying all your payments.
On the other hand, it probably wouldn’t be worth taking out a personal loan or setting up a balance transfer credit card if you’ve got, say, a mortgage, car loan, and just a few low-interest credit cards. This is because you’ll most likely end up paying more in interest once the interest fee grace period expires.
As a final example, you’d never want to take out a secured debt consolidation loan if you didn’t actually have the assets to back it up. These types of loans work by providing the lender with some type of deposit for their security, like a car or some other type of value. In this case, it might be worth looking into an unsecured loan instead.
Examples of debt you can consolidate
Let’s take a closer look at some of the different types of debt you can consolidate into one single loan. From debts you’ve accumulated through business to more common debts like utility bills, you can consolidate just about any kind of debt.
Payday loans
Payday loans are notorious for their high interest rates due to their short-term nature. As we’re all aware of at this point, high-interest loans can quickly stack up and entrench you in a cycle of debt.
By combining all your loans into one, you’ll enjoy a much lower total APR, as well as having more flexible repayment terms. Naturally, this can make it a lot easier to stay on track with your budgeting, which can stop you from getting into further debt in the future.
Lastly, when you only have to make one payment every month, it’s a lot easier to make payments on time which prevents any further damage from being done to your credit score.
Store cards
We all like the benefits that come with store credit cards — with their fairly substantial discounts and different types of rewards, it’s always nice to get something for free. However, the uncomfortable reality is that they often come with excessively high interest rates and fees.
In this case, it'd be wise to consolidate all your different credit card balances into one single account so you can expect a bit more consistency in the fees they charge, rather than being charged different rates depending on the card you’re using.
This doesn’t mean you have to close all your different credit card accounts, though. As mentioned in previous articles, banks and lenders will often check to see how long your credit history spans when assessing your loan application, and it can help your chances by demonstrating that you’ve had multiple different accounts opened for a while.
Utility bills
Similarly to credit card bills, unpaid utility bills can accumulate very quickly, making it fairly insurmountable to keep up with monthly repayments. When you’ve consolidated all of your utility bills into a single loan, you’ll notice a marked difference in your organisation and progress when it comes to debt reduction.
In addition, you can actually improve your credit score by making timely payments, so it’s in your interest to move all your bills into one location where you can stay on top of them.
Business debts
Running a business is no easy task, and any business owner is all too familiar with the debt that can rack up from company credit cards, loans, and any other miscellaneous costs.
Because we often only take out a loan when we need something specific, the amount of different credit accounts we have opened will only increase in size for every different loan we wish to take out.
As a result, you’ll often have issues when it comes to managing cash flow and various other business expenses. However, because of how debt consolidation loans work, you’ll reduce the fees you’ll have to pay when you eliminate all those unnecessary credit accounts.
Tax debt
If you’ve currently got any unpaid tax debt, it’d be a smart financial move to consolidate this as well. Debt consolidation loans let you pay off your tax debt in full, which means you can stop worrying about further interest and penalties almost immediately.
Not only that, but it also gets HMRC off your back and helps you avoid any legal action.
Understanding your options
In this section of the article, we’ll be going over the pros and cons of every kind of loan you can consolidate debt with, as well as providing a bit of guidance as to which one is best for your specific circumstances.
Secured loans
Secured loans are a popular way of consolidating debt that involves depositing some kind of collateral to reassure the lenders. As mentioned earlier, you’ll normally find that a secured loan has much lower interest rates than any other kind of loan because the lender already has some other sort of deposit instead.
Their catch, however, is that the bank can repossess your collateral if you fail to repay the loan. Understandably so, this makes them a slightly risky option if you’re not confident in your ability to repay the loan.
| Pros of secured loans | Cons of secured loans |
|---|---|
| ✔️ Lower interest rates — More often than not, secured loans have lower interest rates than unsecured loans, which can save you money in the long run. | ❌️ Risk of losing collateral — If you can’t pay the loan back for some reason, the lender or bank can take possession of your collateral, which could be as serious as losing your house or car. |
| ✔️ Higher amounts — Because it’s secured by collateral, lenders are often willing to lend larger amounts than with most other loan options. | ❌️ Longer repayment terms — While longer repayment terms can make your monthly payments more manageable, it does mean that you could end up paying extra in interest throughout the life of the loan. |
| ✔️ Longer repayment terms — They typically have lengthy and flexible repayment terms which can make your monthly payment much more manageable. | ❌️ Additional fees — There’s normally a few extra fees attached to this option, such as property valuations or any legal fees that ultimately add to the total loan cost. |
Unsecured loans
Unsecured loans tend to have higher interest rates because the only security that lender has is your creditworthiness, meaning they’re at a higher risk than if they had your car as a deposit.
So, if you’re less comfortable with the idea of leaving your car or any other valuable possessions in the hands of the lender, unsecured loans are the way to go — just make sure your credit rating is high enough.
| Pros of unsecured loans | Cons of unsecured loans |
|---|---|
| ✔️ No risk of losing collateral — Because there's no collateral, you don't risk losing any precious possessions if you fail to repay the loan. However, your credit score will take a major blow if you don’t make payments on time, so they’re not entirely risk-free. | ❌️ Higher interest rates — These loans are known for their high interest rates, which means you’re at risk of falling back into the same trap if you don’t pay off your debt before the 0% APR period ends. |
| ✔️ Fast approval process — Unsecured loans often have fast approval processes since they’re based on simple criteria. | ❌️ Lower loan amounts — Because there's no collateral, most lenders aren’t as willing to lend out larger amounts as they would with secured loans. |
| ✔️ No additional fees — These loans typically don't require any additional fees like secured loans do, making them the more affordable option, all things considered. | ❌️ Shorter repayment terms — In general, unsecured loans are for the short term like payday loans, meaning you might have to pay more per month than secured loans which have longer repayment terms. |
Also Read:
Balance transfer credit cards
These are a type of credit card you can apply for that lets you transfer entire balances from one credit card (with high interest rates) to a new card with low interest rates.)
In addition to having lower interest, these cards often have a 0% APR introductory period which means you don’t stack up any extra interest while paying off your current debt.
| Pros of balance transfer credit cards | Cons of balance transfer credit cards |
|---|---|
| ✔️ No collateral — Like unsecured loans, balance transfer credit cards don't require collateral, which means you don't risk losing a significant asset if you don’t make the loan repayment promptly. | ❌️ Short introductory period — While most of these cards do have an interest free period, it’s only around 12–18 months. |
| ✔️ 0% APR — It’s been mentioned several times in this article, but this is the main selling point of balance transfer cards, and can be particularly beneficial if you have high-interest credit card debt. | ❌️ Balance transfer fees — There’s often a fee for transferring cash from one bank to another, which can be either a percentage of the balance being transferred or a flat fee, depending on the bank. |
| ✔️ Easy to apply — Sending off an application for a balance transfer credit card is often quick and easy, and you can usually do it online. | ❌️ Credit requirements — In order to actually qualify for a balance transfer credit card that specifically has 0% opening interest rates, you usually need a good credit score. |
How to choose the best option
To round things off, let’s consider the following factors to help you decide which debt consolidation loan suits your needs best:
Your credit score
Depending on how good your credit score is, you might be eligible for lower interest rates and better terms, but you’ll have fewer options if you have a bad credit rating.
The amount of debt you have
If you’ve already got a large amount of debt on your hands, a secured loan which offers higher limits could be a better option. However, no option is a good option if you can't make the repayments.
Your ability to repay the loan
Before taking out any loan, consider whether you'll actually be able to make the monthly payments as per the lender’s terms and conditions.
Additional fees
When comparing loan options, make sure to consider any additional fees and charges that may be involved, such as application fees, legal fees, or balance transfer fees.
