Debt Consolidation Loan

or debt reorganisation

A debt consolidation loan is where you apply to a lender for a loan to reorganise, or clear your debts.

These loans are often advertised as ‘consolidation loans’.

This means you swap some or all of your creditors for just one creditor.

If you own your home, the lender will probably want to take a charge* on it.

You should shop around for the best deal from high street and internet lenders.

If you have a poor credit rating, you may not be able to get loans on the best terms.

The Debt Counsellors does not organise debt consolidation loans and recommends you should seek advice from us before considering this option to see whether this would be in your best interests.

Debt Consolidation Loan

A consolidation loan will only help if:

  • it is used to pay some or all of your existing debts
  • the repayments on the new loan are no more than those you are already making towards your existing debts, and you can afford to make them.

Otherwise, the new loan will simply add to your debt burden and make your problems worse.

You will also need to look very carefully at how long the loan will take to repay, what interest you are going to have to pay compared with what you are currently charged; and what charges or penalties there are, for example for late payments.

Advantages of a Debt Consolidation Loan

  • You will be making one monthly payment on one loan rather than many payments to different creditors.
  • Your monthly payments may be lower, or at least should not be any higher.

Disadvantages of a Debt Consolidation Loan

  • You may have to pay fees for arranging the loan. Always ask for full written details of all fees.
  • If you have a poor credit rating, you may not be able to get a loan or you may be offered poor terms and conditions, for example a high interest rate.
  • If the loan is secured on your house or other asset, then it could be taken from you (repossessed) if you do not keep up the payments.
  • Interest rates often change over the loan period, making it difficult to work out what the total cost of the loan will be – check if the interest rate is fixed or variable.
  • Consolidation loans are often offered over a longer period of time than your original debts. This means that even if the interest seems reasonable, the length of time you have to repay it can increase the overall cost of the loan significantly, so you end up paying more.
  • If you don’t clear all your existing borrowing, the new loan is likely to make your debt problems worse and make it more difficult for you to make all your payments.

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*Having a charge on your home means that if you don’t repay the debt, the creditor has a claim on the proceeds if the property is sold.

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