If you’re feeling like you’re in over your head with juggling multiple debts and credit card repayments then you should consider applying for a debt consolidation loan.
Debt consolidation loans can be beneficial because they:
- house your debts in one place,
- have a clear repayment schedule, and
- have an endpoint in sight.
However, these loans need to be approached with caution because there’s also a chance of ending up worse off than when you began.
Before rushing in and committing to the loan, you should review everything in this article about using a debt consolidation loan as a strategy to manage and consolidate your debts.
What’s the Point of a Debt Consolidation Loan?
If you have multiple debts, such as credit card debt or other personal loans, it can become challenging to manage your finances. This is especially true if they all have different repayment periods and conditions to abide by.
A debt consolidation loan is usually a loan that you take out to effectively combine your numerous smaller debts into one that can be more easily managed.
This means you need to first be able to calculate how much you owe in total for all your existing debts and then take out a debt consolidation loan to cover that amount.
Once the consolidation loan is approved, you pay off each existing debt in full and therefore will only need to handle and pay off your new loan.
If you do choose to use a loan to consolidate debt, then you have the option of applying for either a secured or unsecured loan.
How Does a Secured Personal Loan Work To Consolidate Debt?
Secured loans require equity in an asset you already own, such as your existing property to be put up as security against your loan.
This means in the event you’re unable to honour your repayments, your lender will have security to fall back on.
Lenders often offer secured loans with a lower interest rate because they have security on your property. That way, you can have lower repayments and pay off this loan faster.
Take note that you will only be able to take out a secured loan to the amount of the asset you’re offering as security, as this could be a constraint.
How Do Unsecured Personal Loans Work To Consolidate Debt?
As the name implies, an unsecured debt consolidation loan isn’t secured against an asset.
As a result, an unsecured personal loan is considered to be a higher risk to lenders.
You can expect to pay higher interest rates with unsecured loans, and lenders could offer you a smaller maximum loan amount.
But, because the lender won’t need to validate the asset as security, unsecured loans could be quicker and easier to process.
What Are the Benefits of Debt Consolidation Loans?
There are three main benefits when it comes to loans used to consolidate debt.
Even if all three benefits seem attractive to you and good enough reason to take out a debt consolidation loan, take care to look at the risks critically before making up your mind.
Consolidating Debt Effectively Houses Your Debts in One Place
Consolidating debt means paying only your personal loan monthly repayments to one single lender.
Having only one debt and one lender can make managing your finances much easier because nothing can fall through the cracks or get forgotten.
You can easily log on to online lenders’ banking portals to view your statement.
Consolidating Debt Gives You a Clear Repayment Schedule
Instead of managing various debit orders and payment schedules going off at different times for different amounts, you only have to focus on one loan repayment.
With a consolidated loan, you’ll be paying the same loan repayments every single month on the same date. This makes it much easier to plan and budget.
Debt Consolidation Gives You an Endpoint in Sight
It can be tough to visualise the endpoint when you have various other debts with different loan terms and timeframes.
A personal loan for debt consolidation lets you know exactly when the loan will be paid off, and you can work towards that date.
What Are the Risks of Debt Consolidation Loans?
A debt consolidation loan comes with some risks that should be considered, and it’s worth considering the help of a mortgage broker or even the national debt helpline before you go ahead.
You Could Find Yourself in Deeper Debt
If you’re already struggling to deal with your existing debt repayments, there’s a considerable risk that you won’t be able to pay off your debt consolidation loan if the rates are not lower.
When taking out a debt consolidation loan, be sure to think long and hard about whether you’re disciplined enough to service it honourably. You want to avoid getting defaults on your credit score as much as possible.
You Could Pay Higher Interest
Taking out a debt consolidation personal loan with lower monthly payments will mean you lengthen your repayment period. While interest rates on personal loans may be lower than other credit cards, your total costs could end up being higher because you’ll be paying interest over such a long period. Thus you should always aim to pay it off at a faster timeframe.
You Could Be Tempted To Spend More Money
If you don’t close your existing credit cards after paying them off, you could be tempted to start using them again.
And, you could be tempted to take out a personal loan amount larger than your debts, meaning your debts increase even more.
How the Mortgage Agency Can Help
Our mortgage brokers at The Mortgage Agency are experts in debt consolidation, and they can help you apply for a personal loan.
We help you establish your borrowing power and advise you on whether a secured loan or unsecured loan will best suit your financial situation.
Then, we can help you decide between a fixed interest rate or a variable interest rate for your personal loan.
We’ll help you navigate any early repayment fees and penalties and find the most suitable product available.
Using personal loans as a debt consolidation strategy can be beneficial, but they don’t come without risks.
A secured loan can have a lower interest rate, but it means you’ll have to put up an asset as security and risk losing it. An unsecured personal loan doesn’t require security, but it can have a higher interest rate.
Consolidating existing debts using a personal loan means only one personal loan repayment from your bank account to manage, rather than multiple debit orders. You know exactly when the payment is due and how much it will be. And, you know when the loan term ends, so you can count down to day zero.
Taking out a personal loan could also mean you land up with even more debt if it’s not managed correctly, and at the end of the day, you could be spending more money than you would have if you just serviced your existing debts punctually.
There are numerous things to weigh up before making your decision, and using the help of a qualified professional can make the decision clearer. Contact us at The Mortgage Agency today to make an appointment with a mortgage broker.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.