Multiple debts are a common issue in the modern era, with lots of financial challenges. Personal loan, car loan, medical loan, credit card, bad credit loan, etc., so many debts make space in your life. As a result, your finances suffocate, and you become a victim of multiple debts.
Consolidating debts through a debt consolidation loan has always been a dependable and popular solution in such a situation. The loans help you manage the mess of obligations and get back the balance of life.
What is a debt consolidation loan?
A debt consolidation loan is a short to medium-term loan that merges all debts into one. It is done for two major purposes. First is to pay one instalment in place of multiple ones. Second is downsizing the debt burden by reducing the rate of interest.
But you need to understand that only in the case of scattered and many obligations, these loans have worth. Those with a small size, low-interest debt should not consider this option. Hence, before you look for this solution, get to know “is debt consolidation a good idea” for your financial circumstances.
How do debt consolidation loans in the UK work?
With the following steps, you can get the maximum out of consolidation loans. But make sure you don’t skip any step.
- Assess your debts – Assess all the debts you are supposed to merge into one big loan. A mix of small or low-interest and high-interest debts can be merged. However, the role of affordability is always there; you can consolidate all debts only when you actually qualify for it through a provable creditworthiness.
- Apply for a loan – Now, when you are clear about your requirement, it is time to apply for a loan. This does not take much time, especially if you choose an online lender. The application needs some specific financial and personal details—current income, bank statement of the last six months, verified residential address, and an age proof.
- Loan approval and disbursement – Once the funds are approved, you receive a loan agreement with all the terms and conditions. It includes a repayment plan, interest rate, tenure, and additional charges such as a late payment penalty. Read it carefully and accept if you agree to the conditions. Your consent is vital to proceed with the fund transfer.
- Pay off the existing obligations – After accepting the agreement, you receive the funds in the account. Now pay all the debts for which the consolidation loan was taken. This is done under the monitoring of the lender.
- Repay consolidation loan – Right after the fund transfer, your repayment schedule is applicable. Timely payment of instalments is necessary if you do not want to increase the debt burden again. After all, this is why debt consolidation help is worth it.
What are the types of debt consolidation loans?
Pending debts can be consolidated in various ways. Different types of consolidation products help you manage debts.
- Secured loan – As you can understand, these loans are secured by collateral. As per the lender’s policies, security can be anything from a vehicle to a home or anything of value. This is usually used in case of high-interest debts or too many debts that cannot be merged into a small amount. Due to pledging assets, the rate of interest is low.
- Unsecured loan – For smaller debts, you do not need to provide assets. Hence, unsecured loans are there to solve the purpose. But the interest rate of unsecured debt consolidation loans is higher than that of secured ones.
- Home equity loan – With time, if your home has attained a higher value, you can encash it as a loan and pay multiple debts. These are considered one of the best options to manage debt. It is because you are using the increased value of your property.
- Debt management plan – This includes a financial institution that bargains with lenders on your behalf. At the end, they get a repayment plan in exchange for payment of all other loans. This time, the debt is downsized considerably, waiving off charges such as late payment penalty. Also, it achieves a lower debt consolidation loan interest rate.
- Balance transfer credit card – It is about using a credit card with a 0% interest rate during a certain promotional period. You can transfer all high-interest debts to this card and pay them off. But make sure you pay this credit card repayment before the 0% interest rate payment ends.
Benefits and risks of debt consolidation loans
For sure, like every loan product, this too has some of its strong and weak sides. The comparison below will help you take an even more rational decision.
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Benefits |
Risks |
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Simplified payment helps you manage debts successfully. One instalment in place of many offers ease. |
An extended repayment period may mean that you end up paying a higher interest rate. This increases the total cost, nullifying the purpose of debt consolidation loans. |
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Predictable repayment plan with a fixed interest rate and tenure. This makes it easy for you to make a repayment budget. |
Late payment penalty is applicable, and even the first delayed instalment incurs the charges. We do not charge right away; instead, we give a one-week buffer time after the due date. |
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Improve your credit score with affordable payments. This is why debt consolidation is the first choice for many people with poor credit. |
Impact on credit score is visible as per your payment behaviour. Timely paid repayments give a rise in credit score. Delayed payments cause a decline in credit score. |
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A lower rate of interest is among the primary aims of debt consolidation loans. Hence, repayments are budgetary, and paying them back during tenure is easier. |
Not always cheaper, especially if you have a weak creditworthiness. In that case, you will get a higher interest rate. |
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Save money by paying less at a low interest rate. Invest that money or create an emergency fund that offers a financial cushion during urgent needs. | This risk of losing the asset is always there if you have taken a secured loan for debt consolidation. Defaulting on the loan will make the lender claim your pledged asset. |
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Stress is reduced considerably. No need to mention how the debt burden provokes many people across the world, even to commit financial crimes. That is a result of their unstable financial life. Hence, managing things at the right time is necessary. |
Urge to gather more debt. Once you see that the debt is manageable after consolidation, you feel the urge to take out a new loan. You know, if debts scatter, a new loan will consolidate all of them once more. But that is not a healthy financial habit. |
Does debt consolidation affect your credit score?
Of course, it does, and in several ways mentioned below.
- Late payment means a drop in credit score. Hence, be sure you check creditworthiness through the debt consolidation loans, bad credit, no credit check. Otherwise, this can cause a poor credit score. In fact, most of the applicants are for debt consolidation loans for bad credit.
- Applying for consolidation loans many times can be a bad decision. This shows that you are not managing your finances responsibly. This is why you need to merge debts repeatedly. This leaves a bad impact on the credit score. Even if you apply for debt consolidation from a direct lender that acts flexibly, it cannot prevent the loss of your credit score.
Conclusion
All-inclusive information about debt consolidation above provides a deep insight into its utility. Also, you get to know that the product may not be suitable for all types of borrowers. Those who don’t have multiple debts should not consider it. In fact, in place of that, the snowball or avalanche method. If you are struggling with the burden and confusion of many obligations, it is time to decide. Take financial advice and be certain about your financial future.