What is a debt consolidation loan?
A debt consolidation loan is perfect if you have more than one outstanding loan and you are struggling to meet your monthly repayments. With a debt consolidation loan, you can combine your outstanding loans into one manageable payment with lower interest charges, over a longer period of time.
There are two types of debt consolidation loan:
- Secured – A secured loan, is where the amount you’ve borrowed is secured against an asset, usually your home. If you miss a repayment, you could lose your home.
- Unsecured – An unsecured loan is where the loan is not secured against your assets, as a result, you usually pay higher interest rates.
Secured debt consolidation loan
With a secured loan you are placing an asset of similar or greater value up as collateral to secure lower interest chargers or if you have a poor credit history. Although you are placing your main assets at risk, you are also reducing your monthly interest payments and potentially securing better payment terms if you have a poor credit rating. The danger is that you can’t meet your financial obligations and default on the payment terms, in this scenario the asset will take over by the loan provider and sold to meet the outstanding debt (with any remaining value returned to you, after charges and fees).
You should get free debt advice before you consider taking out a secured debt consolidation loan at MoneySense
Why apply for a debt consolidation loan?
You should consider a debt consolidation loan under the following circumstances
- You are unable to meet your current monthly repayment charges across multiple loans
- You are unsure or confused by the number of loans you have i.e. credit cards, personal loans, family loans and more.
- You are not able to pay off the capital due to the high-interest charges across your outstanding debt. i.e. Payday loans.
A debt consolidation loan will help you merge all outstanding debt under one, low monthly repayment scheme. With the goal to help you better control your finances and set up a plan to get debt free.
Debt consolidation loan fees & charges
As with every loan you might incur fees and charges when applying for a debt consolidation loan. Therefore make sure you are aware of what you are being charged, what effect this has on the outstanding debt and that the benefit of transferring your debt isn’t wiped out by the additional charges.
- Make sure to read the small print carefully, understanding your loan is very important and you must be clear on the terms of your arrangement.
- Make sure to check with your current loan providers to see if there are any fees for paying off existing loans early, speak with them and explain your situation.
- Avoid paying a fee for a third-party to organise the consolidation loan on your behalf, unless you’re getting advice (and you’re sure it’s worth the cost).