What are debt consolidation loans?
Debt consolidation is when you opt to take out a brand new personal loan as a way consolidating existing debt. It works by repaying all (or in other cases, just some) outstanding debt but all through one single monthly payment. There are a number of debts you can use debt consolidation loans to pay off, this includes store cards, credit card repayments and existing personal loans.
How do they work?
If you decide to take out a debt consolidation loan, then what happens is, is that all your borrowing is moved into one single loan as opposed to being in multiple locations. After this has taken place, you will only need to pay your consolidation loan provider each month, as opposed to having to carefully manage potentially lots of separate payments to a variety of lenders.
This is usually an unsecured loan, which means that it is not secured against any property you have, but rather other affordability checks are implemented by the debt consolidation provider to ensure you could manage loan repayments.
What are the benefits of debt consolidation loans?
There are a number of advantages when it comes to debt consolidation loans. For example:
- This type of loan can help to reduce your monthly outgoings
- It can help you with improving your money management skills, but you should always make sure you can afford the repayments in the first place
- It can help simplify the process of paying back your debts, giving you some peace of mind and making it less overwhelming to deal with. It can be much more straightforward when you know there is just one payment you need to pay each month.
- You will only have to keep in mind one interest rate that you will be paying off
- It could even help to improve your credit score. This is because if you close other credit card or loan accounts, and lending providers see you are managing your finances effectively then your rating can go up. However, this will only occur if you keep up with your debt consolidation loan repayments.
What are the criteria to apply?
A lender will decide if you are eligible to apply for a debt consolidation by looking at how much debt you have outstanding already, as well as your credit risk.
As a result, you might find that if you have a bad credit score or a number of large debts on file then the lender may only be willing to provide you with a secured loan instead. That would mean securing your property against the loan in order to reduce the lender’s overall risk to you.
The lender will also look at how much you are wanting to borrow when applying for a debt consolidation loan, as well as your credit history and how long you will need to be able to repay the debt.
You will find that if you have a good credit rating and low levels of outstanding debt, then accessing a debt consolidation loan will be easier.