If you have multitude of different debts and are worried about repaying them all each month then debt consolidation is for you. Debt consolidation loans can consolidate your existing debt into a more manageable monthly payment.
What is debt consolidation?
Debt consolidation is when a borrower has existing debts and liabilities and wishes to borrow the same equivalent amount to repay those debts and replace with a single repayment.
Multiple debts are then replaced with one new. It’s a larger yet more manageable debt. The new debt typically allows borrowers to receive a lower interest rate and a smaller monthly repayment amount.
Borrowers use debt consolidation as a way to manage different types of debt including credit card debt, student loan debt or existing personal loan debt. Usually, debt consolidation loans are unsecured.
How debt consolidation works
If you’ve got balances on credit cards, store cards, car hire agreements, overdrafts and loans, you probably are making several repayments per month at different rates and different amounts. A debt consolidation loan helps borrowers consolidate their debts into one monthly repayment at a fixed rate.
Debt consolidation can be imperative if borrowers are searching for ways to reduce not only their cost of borrowing but removing the stress of calculating their monthly budgets that are used up attempting to repay various debts on different days of the month.
Debt consolidation is about repaying all existing debt and then only paying one lender, one amount, each month.
Because borrowers are only paying one amount from one lender each month, compared to paying back several debts, the monthly repayments are typically less than paying 4-5 debts at once, allowing borrowers to use the additional amount saved for other purposes, like saving or paying off other debt.
3 reasons to consolidate your debt
If debt consolidation appears attractive to you, then before consolidating, it is crucial you consider which of the following is the most vital for you:
- Decreasing the overall cost of borrowing
Borrowing from several lenders at varying interest mates means the amount you owe can become astronomical. Consolidating debt means only one interest rate that is typically lower than your multitude of debts.
- Reducing your monthly repayments
Having only one debt with a more favourable interest rate means that borrower’s monthly repayments are lower aiding them to free up funds to save or pay off other debts not covered by the loan.
- Placing all of your existing debts into one monthly payment for convenience
Multiple debt repayments mean multiple payment dates. Ensuring you repay your debts is vital for maintaining a positive credit score. Failing to do so will cause difficulties when attempting to obtain credit in the future. Consolidating debt means only one payment, removing the stress of remembering to pay each month.
Debt consolidation loans compared to credit cards can be much cheaper and easier to repay each month, plus providing a clear payment structure of when to pay and when the amount will be cleared.
Sadly, those with a bad credit score probably won’t receive a competitive loan interest rate. A possible alternative is to consider joining a credit union or a payday loan. For many, they’re a welcome option.
Those with an adverse credit rating could still be accepted dependent on which credit reference agency the lender chooses to use.
Hence, before making an application for a debt consolidation loan, it is probably a good idea to verify your credit scores with several credit reference agencies first to discover whether you are likely to be accepted or not.
Knowing which lenders will have given a favourable score will determine which ones you should apply to, increasing your chances of being approved for a debt consolidation loan.
What if I cannot stop spending?
Traditional debt advice states that you should ‘never borrow your way out of a debt problem’. However, this ignores the differing cost of different debts.
If it’s likely that borrowing elsewhere more cheaply to replace to existing borrowing, then the lower interest rates or reduced monthly repayment could mean more of your money is put towards repaying the debt as opposed to the lender’s interest and fees.
The point here is never to borrow more to get out of a debt problem.
Debt consolidation loans then, are ideal if you can decrease your spending habits; by reducing your expenditure, you are setting yourself up for when you have finally repaid your debt, so you will not need to borrow again afterwards.
With a debt consolidation loan, you should never borrow more than the debt amount, as you are then getting further into debt, even if you desperately want to go on another holiday!
Finding a way to consolidate debt that’s right for you
Provided you do not have a bad payment history, been declared bankrupt or have a CCJ or IVA in the last six years, asking your bank or building society should be the first place you ask about a debt consolidation loan.
Traditional high street lenders will offer debt consolidation loans to those who are 21 and live in the UK, already have a debit card and a regular income.
However, if you do have poor credit history then obtaining a debt consolidation loan from your bank or building society may not be an option for you.
Loans with Peachy
At Peachy we have a dedicated team of specialists who assess and approve short-term credit for those with a low credit rating, meaning applicants have a higher chance of their loan request being approved.
Applying for a loan with Peachy is entirely free of charge. Using our loan calculator, you can view exactly how much it will cost you and the multiple repayment options open to you.
It is vital to note that not everybody who applies for a debt consolidation loan will be accepted. As a responsible lender, Peachy will assess each application individually and sympathetically.
As with any loan, responsible borrowing is essential. You must be able to repay your loan commitments in full and on time. Not doing so will help you build up a cycle of debt, making your financial circumstances even worse.