Expert advice: pros and cons of debt consolidation loans
A debt consolidation loan is a popular product used by thousands of Brits each year to help pay off multiple debts. David Beard, founder of comparison shopping site Lending Expert, explains.
With this type of product, you can take on all the unpaid debts you owe, including credit cards, personal loans, mortgages, etc.
This process should be more convenient, convenient, and ultimately help you get out of debt.
With the average UK household needing around Â£ 19,000 to run their home each year and stay on top of their bills, this can be an effective form of finance, but there are some things you should consider.
A debt consolidation loan might be the right option for you if you have multiple types of loans and credit cards outstanding – and it’s getting a little too much to handle.
If you fall behind on things like personal loans and credit cards, you may be charged late fees or arrears and these may start to add up.
With a debt consolidation loan, you are essentially paying off all of that unpaid debt in one go – and then you only have one unpaid loan to pay the lender. So all in all, it could save you money on possible late fees and overdue payments.
Plus, if your debt consolidation loan is competitively rate, you could save money overall. Low rates are available if you have a good credit rating and a stable income – and that would be an unsecured loan.
You can also use a secured loan and borrow money against your home or property – and if your property is valuable, it could help you borrow large sums and at competitive rates (from 3% APR ).
While debt consolidation can be effective, there are some things to watch out for.
Even if you are paying a low rate for your loan, you need to calculate it carefully. If your loan is extended for a longer period, say 3, 5, or 10 years, interest will start to accrue and you could pay more overall.
If you are considering a secured debt consolidation loan it will use your home as collateral and if you are prone to falling behind on repayments it could put your family home at risk of repossession.
Debt consolidation is great for consolidating your existing debt and anything you have past due. But the benefits of having one place to repay won’t be appreciated if you start adding more debt to your name, like financing a car or additional credit cards.
So, debt consolidation might be better if you’ve done all of your big purchases in life, like a house, car, and weddings, but it might be less appropriate if you still have a lot of debt ahead.
What are the prices offered?
Interest rates can vary depending on your credit score and whether you are using security.
At the bottom of the scale, you could pay a 3% APR or a 99% APR depending on your credit history, use of security, and the type of lender you choose.
A debt consolidation loan can be a very effective way to manage and pay off your existing debt, but it’s not for everyone.
A lower rate isn’t always a lower rate if you extend your loan for several years – in which case interest can accumulate and you end up paying more. It’s always important to consider your options, whether it’s a debt consolidation loan, 0% credit card balance transfer, or even borrowing from family members for help you manage your debts.
If you are considering consolidating existing loans, you should know that you can extend the terms of the debt and increase the total amount you are repaying.
Think carefully before securing other debts against your home. Your home can be repossessed if you don’t pay off a loan or other secured debt.
To see if a debt consolidation loan is right for you, you can check your eligibility for free with Lending Expert today or simply call 0161 820 8099.