> Debt Consolidation Loan - UK Guide
In a nutshell
A loan that pays off all of your existing debts so you only have one loan to repay.
Best Loan for
People that need help managing their existing debts.
You won't be able to get an 'average' loan amount for debt consolidation loans. Firstly, your lender will work out how much you can borrow based on your own individual salary and expenditure. Secondly, each lender will have their own minimum and maximum borrowing limits and may base how much they will lend you on the type of loan you choose (for example, whether you take out a secured or an unsecured option). This is all based on helping you make sure that you can afford your repayments.
You will probably be offered anything between 1-25 years for a debt consolidation loan. Again, this will depend on the individual lender/loan.
If you are currently trying to pay off various credit cards and other debts then you'll be paying some of the highest interest rates in the sector. A debt consolidation loan can be taken up at much more manageable rates so you'll pay less back each month and over the course of your loan. You'll also put an end to the interest that can be added with cards - for example, if you can only afford the minimum payment every month on a credit card then interest will just keep being added to your original debt. This isn't an issue with a debt consolidation loan. Your finances as a whole will start to look much healthier if you only have one payment to make each month and it'll be easier for you to get a budget to get back on a firm financial footing.
What to look out for
Your monthly repayments may be lower with a debt consolidation loan, but you may end up paying back more in the long run - especially if you take out a longer term product. You may also find yourself having to use your home as a guarantee for a secured loan - if you default on payments then you are basically putting it at risk. A payment protection scheme could help with this. The rates you are given for a debt consolidation loan may be lower than those you are currently paying but how low they are may vary according to your own circumstances. People with financial issues that come up on credit checks, for example, may find themselves paying extra. And, you may well have to pay a fee to get a debt consolidation product in the first place.
One thing many people forget is that they may have financial 'ties' to their existing lenders. So, when it comes to using your debt consolidation to repay these debts, they find that they are charged additional early repayment fees. You'll need to check if this is the case with your debts as it may mean you need to borrow more money. Many people also fall foul of debt consolidation loans because they carry on spending once their debts are repaid. So, they'll be comfortably managing their debt consolidation repayments, but then they'll take out a couple of new credit cards, a store card and maybe even a new loan. Their original intentions may have been good - but that didn't mean that they actually changed their spending habits. So, it pays to be sensible here.
If you qualify for one, a mainstream personal loan may do the same job for you.