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Full Facts About Debt Consolidation Loans

Money Savings Advice Are debt consolidation loans easy to get

Getting a debt consolidation loan is easier than you might expect. Though you can’t guarantee you’ll be approved, it may surprise you to see how much money you might be approved for.

This higher approval rate is a result of the type of loan you’re choosing. Debt consolidation loans aren’t classed as an extra loan.

Applying for a Debt Consolidation Loan

Debt consolidation loans will only accept people who have a low-to-mid level of debt. If you have uncontrollable debt, you are unlikely to be accepted even if the loan would help you make affordable payments each month.

Instead, they’re intended as a replacement for the debts that you’ve already got. You’re only adding to your debt by a fairly small amount, but will be expected to pay back what you owe to any other lenders and banks.

Getting a debt consolidation loan is relatively easy. They’re often quite high value but are easier to get because you’ll replace old debts with new. There are advantages and disadvantages of debt consolidation loans.

Read on to learn more about debt consolidation loans and how likely you are to be approved.

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What Is a Debt Consolidation Loan?

A debt consolidation loan is intended as an option for managing debt. You’re not borrowing to buy new things, but to bring all your existing debts together.

Imagine that you have a credit card, two loans and a car finance agreement. Every month you’re making four different payments, trying to keep up with your debts. You’re dealing with four different creditors, with minimum payments and charges building up in all directions. You might apply for a debt consolidation loan to help you take control of your budget.

You’ll apply for a loan that allows you to pay off every other debt. You’ll then pay back your loans, take full ownership of your car and clear your credit card balance. Now, you’re just left to deal with your debt consolidation loan.

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Benefits of Debt Consolidation Loans

If you’re struggling to manage several different debts, a debt consolidation loan might help.

You’ll only need to worry about one monthly payment, which makes your money easier to manage. You may find that your new monthly repayment is significantly lower than how much you were paying every month before your debt consolidation.

In some cases, debt consolidation may work out cheaper long-term. Calculate the current cost of interest on your debts, as well as any charges or late payment fees. See if debt consolidation could be more affordable when all other factors are weighed up.

With a debt consolidation loan, you’ll owe just one company. You’ll have one monthly repayment, and one debt-free date to keep in mind.

Drawbacks of Debt Consolidation Loans

To make use of a debt consolidation loan, you’ll need to get into more debt. It would be best if you borrowed enough to pay back your other debts, then you’ll have more interest added on top. You’ll be paying your debts back for longer. Only in rare cases will debt consolidation loans work out cheaper overall, so think carefully about all your current payments and the total cost of your debts.

Debt consolidation loans can also be bad news if you’re not great at managing your money. They’re only successful if you make sure that you don’t get into further debt. Once you’ve paid off your loans and your credit cards, ensure that they’re gone for good. You should cancel your accounts and cut up your cards to remove other borrowing options.

Debt Consolidation Loans Best of Intentions

Many people apply for debt consolidation loans with the best of intentions, but leave lines of credit open and quickly fall back into bad habits. If you borrow money to clear your credit card, then use your credit card again, you’ll end up with twice the debt and in a worse situation than before.

Remember that debt consolidation loans will leave you with just one debt-free date. Whilst your previous debts might have been higher at first, they’ll probably have dropped as you gradually repaid different creditors. Eventually, your payments will have been easier to manage.

Perhaps you’d have cleared one loan ahead of the other debts, bringing your monthly payments down. With a debt consolidation loan, your payments won’t go down as time goes on – whatever you agree to pay in the first place is the figure you’ll be paying until the end.

For some people, debt consolidation loans are exactly what’s needed to get in control of debt problems. For many, the risks and costs will outweigh the benefits.

Debt Consolidation Loan Approval Rates

Debt consolidation loans are relatively easy to get. Though they can be high value, they’re replacing other debts that you’ve already got. You’re clearing some debts in exchange for this new loan so that lenders will be a bit more lenient. Providers of these loans are expecting you to be able to manage your repayments because they know that you’ve already been making them elsewhere.

The challenge isn’t getting the loan but finding the loan that works for you. You’ll have to consider the loan term and the costs, making sure that it’ll save money. Obviously, there’s no point trying debt consolidation if it ends up a lot more expensive.

Before you apply for a debt consolidation loan, work out how much your debts already cost. See how much you’re paying in interest each month and be honest about any extra charges.

Are you always late making loan payments, or do you only make the minimum payment on your credit card balance?

Once you’ve worked out how much you’re being charged every month, you can see if debt consolidation’s cheaper. Keep in mind that other debts may have finished at different times. If one of your loans is due to be repaid within six months, would your remaining debts be easier to manage without choosing debt consolidation?

Since debt consolidation loans can be quite easy to get, it’s important to take extra care to see if it’s what you really need.

How Would a Debt Consolidation Loan Benefit You?

Loan TypeAPROriginal AmountOutstanding AmountMonthly RepaymentDuration RemainingTotal interest paid
Personal Loan 13%£5000 (3 year)£3487£14524 months£155
Personal Loan 23%£3000£2092£8724 months£93
Credit card9.9%£2000£2000£6436 months£305
for 24 months
for the remaining 12 months
Consolidation Loan6.1%£8000£8000£24336 months£753
Calculations by Money Savings Advice

In the above example, where two personal loans and a credit card are on relatively reasonable interest rates, a debt consolidation loan may not be ideal – you’ll save £50 per month for two years. Still, your third year would be almost £200 a month more expensive, and you’d end up paying £200 more in interest.

But for high-interest debts:

Loan TypeAPROriginal AmountOutstanding AmountMonthly RepaymentDuration RemainingTotal Interest Paid
Payday Loan991%£1000 (6 months)£1000£3166 Months£896
Credit Card49%£1000£1000£10512 Months£232
for 6 months
for the remaining 6 months
Consolidation Loan6.1%£2000£2000£17112 Months£64.89
Calculations by Money Savings Advice

This stark contrast shows why a debt consolidation loan would be more suitable. You’d pay around £250 less a month for the first six months and only £70 more for the remaining six months, and you’ll ultimately save over £1,000 in interest payments.

Alternatives to Debt Consolidation Loans

Debt consolidation loans shouldn’t be considered if you won’t be able to keep up with repayments. You’ll be moving your debts to face the same problem somewhere new.

If you’re finding it difficult to manage your money, reach out to debt management charities. A debt management plan may be more suitable, and other debt options are available. Debt management plans work a lot like a debt consolidation loan, but you’ll pay a debt charity, and they’ll distribute the payment to each of your existing creditors. Many creditors will agree to freeze their interest, so this can help you get out of debt.

Debt consolidation loans shouldn’t be chosen just because they’re easy to get. Make sure you think hard about what you can afford and whether they’ll actually help you. Many people that choose debt consolidation loans are choosing them for the wrong reasons. You may actually end up owing more money and maintaining your debts for even longer.

Quick Debt Collectors FAQs

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How Can Money Savings Advice Help You Reducing Your Debt?

Here at Money Savings Advice, we have partnered with some of the UK’s debt release brokers. They have already helped thousands of people reduce and remove a high percentage of debt, and if you are struggling with debt, they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers, then click on the below and answer the very simple questions.

Ignatius is one of our leading financial specialists. With over eight years of financial experience, he has vast experience and knowledge of the financial sector. When he is not writing about how to make your money go further, he is a true family man.

Ignatius is one of our leading financial specialists. With over eight years of financial experience, he has vast experience and knowledge of the financial sector. When he is not writing about how to make your money go further, he is a true family man.

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