If you need a way to cope with multiple credit repayments, a debt consolidation loan could be the answer. With debt consolidation loans, all of your existing debts are merged into one lump sum, so all of your repayments are sent to one lender, reducing the number of accounts you need to pay off. This makes them useful for individuals in debt difficulty, but debt consolidation loans aren’t suitable for absolutely every case. Before you begin inquiring about this type of loan, there are a few things that you need to consider to make sure that it is suitable for you.
What To Be Aware Of
As with most types of loans, there are some risks involved with debt consolidation loans. Some aspects that you need to be aware of include:
- The total cost – even if the consolidation loan has a lower rate than your existing credit accounts, the amount of interest you pay overall may be more if you are repaying the loan for a longer amount of time.
- The set-up fee – depending on the lender, you may be charged a percentage of the amount you are borrowing to set up the loan. This is something you should research or ask about before agreeing to a consolidation loan.
- The impact on your credit score – while consolidation loans could improve your credit score if paid off on time, applying for a loan and closing old accounts can also have a negative impact on your score.
The Benefits Of Consolidation Loans
While there are aspects to keep in mind when searching for debt consolidation loans, there are several benefits to beginning the process. By merging all of your debt accounts into one lump sum, you could find it easier to pay off your multiple debts in single payments, which may also make repaying the final figure quicker than you may have expected and reduce your stress levels.
Consolidation loans can also have a positive effect on your credit score, thanks to the reduction of your credit utilisation rate. This rate plays a huge role in your overall credit score and by combining your debts into one manageable loan, you could see improvements in only a few months.
How To Secure A Consolidation Loan
If you have decided that a debt consolidation loan is suitable for your needs, start the process by shopping around and using comparison websites to find the best deal for you. You should also seek advice before making your final decision because there may be better alternatives available for you.
Make sure you understand how much you need to borrow by doing your own maths and collating all of your debts into one figure, factoring in interest. This will make it a lot easier when you are applying for consolidation loans and will allow you to easily input the figure into online calculators to find out how much each lender would charge on interest.
Once you have found a trustworthy lender that works for you, simply apply for your consolidation loan and don’t be afraid to ask questions along the way. If you are still not sure if consolidation loans are right for you, please seek financial support from the Money Advice Service to find out about the other options.