Debt consolidation is one of several options for people with many debts who are struggling to keep up with them. If you are trying to clear your debt, then this could be the way to do it. Read the following guide to debt consolidation.
What is debt consolidation?
Debt consolidation is a kind of re-financing if you owe debts to multiple lenders. A debt advisor will help you to roll all of your debts together into one balance. You can then make one monthly payment to reduce the balance until you clear it. This keeps the creditors off your back while you are working towards erasing the debt. However, debt consolidation often requires transferring the debt to a secured loan. If you secure your debt against your property, for example, then you could potentially lose your home. This usually only applies to debt balances above £25,000. Unsecured debt consolidation loans are also available for lower amounts of debt, which come with less of a risk.
What are the benefits of debt consolidation?
Managing monthly repayments becomes a lot easier with a debt consolidation loan – as long as you can afford them. Combining your debts into one place and only making one repayment makes things much clearer. You’ll be able to keep track of your personal finances and get back in control of your debt. Consolidation can reduce your outgoings if the monthly repayment is lower, meaning that you will have more left over for bills or savings. Having one payment date means that you won’t miss repayments, which would negatively affect your credit score. Only one interest rate will apply, so you may end up paying less interest overall. Your credit rating will get better if you maintain repayments and prove that you are a responsible lender now. It also helps to clear debt balances faster.
What are the risks of debt consolidation?
As mentioned, secured loans in particular have the risk of repossession of your assets. Even unsecured loans have their risks, too. Early and late settlement charges, as well as interest, could mean that you end up paying more. This is why you need to calculate and compare how much you would have to pay before opting for debt consolidation. You could end up with a higher interest rate and a longer term, which would negate the point of trying to reduce the debt because it would keep accumulating to a higher amount anyway. Some debt advisor companies also charge high fees for arranging the consolidation loan for you. There could also be a negative effect on your credit history if you close your old accounts after consolidating, because your credit utilization will increase if the credit limit drops.
Who should consider a debt consolidation loan?
Debt consolidation is not the best option for everyone. Having all your debt in one place and reducing your monthly outgoings could tempt you to take out additional short-term loans and get further into debt again. If you know that you tend to spiral into destructive lending, then avoid consolidation. It is only a viable option if you do the relevant calculations and it will definitely result in reducing your debt. You need to work out fees and charges, including the interest, and how long it will take you to pay off the debt. Only go for it if you will be able to afford the repayments and you actually take the opportunity to control your spending habits. You should not do it if you just need some debt advice rather than a new loan. If you have low outstanding debt and a decent credit rating, you should be fine.
Are there alternatives to debt consolidation?
It can be difficult to get an unsecured debt consolidation loan if you have a bad credit history. It can also be scary and a big commitment to consolidate all of your debt. If you do speak to a debt advisor about consolidation, you can also explore your other options with them. These could include an Individual Voluntary Arrangement, a Debt Management Plan, or even insolvency and bankruptcy. Before you go down a more drastic path, there may be other possibilities. You could use savings to help reduce your debt faster and avoid paying more interest long-term if you do have some. A low-interest balance transfer credit card could be a viable alternative to a debt consolidation loan.
Best Debt Consolidation Loans in the UK
If you speak to a debt advisor or a debt advice charity, then they can help you out with finding and comparing debt consolidation loans. Or if you are trying to check them out yourself, it is best to stick to the reputable lenders such as popular banks. Consider the following debt consolidation loan providers if you are looking for one within the UK.
Halifax Debt Consolidation Loan
Whether you are a current Halifax customer or not, you could get a personal loan for debt consolidation from them. They offer a fixed interest rate, monthly payment, and final payment date. The representative APR is 3.5% for loans between £7,500 and £25,000. You will have 1 to 5 years to pay it off, depending on the amount. You would be able to get a higher amount and a longer term if you were an existing Halifax customer. Bear in mind that their highest possible APR is 29.9%, and you may end up with a higher APR than the representative depending on the loan total.
Barclays Debt Consolidation Loan
Barclays offers a personalised quote with no footprint on your credit file if you apply with them online. Their APR representative rate is 5.5% for loans between £7,500 and £15,000. This would be over 2 to 5 years – the lower the loan amount, the shorter the term. They will tell you which rate you would get upfront, so you can compare it with other calculations. You can sign an agreement online from 7am to 10.30pm and consolidate right away. However, you do have to be a Barclays current account holder to apply. They also do not allow debt consolidation for CCJs, gambling, or business purposes. You can use this loan to pay for home improvements but not purchasing property.
HSBC Debt Consolidation Loan
Existing HSBC customers can get an instant decision if they apply for a debt consolidation loan from HSBC. They are also available for non-HSBC customers, but the decision may take longer and the rates may not be as good. It is possible to get £1,000 to £25,000, with 1 to 5 years to pay off a total under £15,000 or up to 8 years for a higher loan than that. There is a 3.3% representative APR for loans between £7,500 and £15,000. However, the maximum APR is 21.9% for these loans. They do allow you to overpay or settle early without charging you an extra fee for it.
RBS Debt Consolidation Loan
Anyone who has had a Royal Bank of Scotland current account for 3 months or a credit card or mortgage for 6 months could be eligible for debt consolidation with RBS. They promise unconditional acceptance to existing customers who apply for such a loan before 5.55pm on Monday to Thursday. You could borrow between £1,000 and £14,950 to pay off over 1 to 5 years, or £15,000 to £25,000 to pay off across up to 7 years. The representative rate is 3.4% APR, but only around half of applicants will get this. Make enquiries before applying if you’re uncertain.
AA Debt Consolidation Loan
The AA doesn’t just help with vehicle insurance, they can help you to pay off loans and store cards too. Consolidate your debt with AA and you could pay 3.1% representative APR on loans from £15,0001 to £25,000. The loan term’s length could be from 1 year up to 7 years. However, there is a maximum APR of 29.9%. If you are new to AA, then you could also get Roadside Assistance from £15 a year instead of full price. Existing AA members could get the benefit of a lower interest rate. AA has a higher eligibility age of 21 for applicants, and to apply you also must earn a minimum of £12,000 a year. They wouldn’t charge extra for additional repayments or for paying off the loan early.