Debt consolidation loans

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Are you in debt? Get debt solutions and find out more about debt consolidation loans at MoneySuperMarket.

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SECURED LOANS: YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE, LOAN OR ANY OTHER DEBT SECURED ON IT. 

We compare loans that can be paid back over terms of between 1 and 25 years. The APR interest rate you’ll be charged depends on your personal circumstances, and will be between 3.2% and 99.9%

This is a representative example of what it may cost: a Loan of £7,500 over 60 months at 3.3% APR would equate to monthly repayments of £135.60, and the total cost of the loan that you pay back would be £8,136.22.

What is a debt consolidation loan?

A debt consolidation loan is when you take out a new personal loan to repay all, or some, outstanding debts through a single monthly repayment. You can use it to pay off debt for:

  • Credit cards
  • Store cards
  • Personal loans

 

what can you use debt consolidation for?

Although your debts won't disappear, merging them into one personal loan could reduce your monthly outgoings and help you better manage your money – as long as you can afford the repayments.

The average household had £7,616 of consumer debt in December 2017, according to the Money Charity. If you borrowed £7,616 to consolidate your debt over three years, at a representative rate of 3.6% APR and an annual interest rate of 3.60% fixed, you would pay 36 monthly instalments of £223.31. The total charge for credit would be £423.02 and the total amount repayable would be £8,039.02.

If the cost of the proposed new arrangement is less than the existing one, it clearly makes sense to consider it.

How do debt consolidation loans work?

With a debt consolidation loan, you move all your borrowing, or a significant chunk of it, from a variety of locations onto a single loan. Rather than making lots of separate payments to different lenders every month, you’ll only have to pay your consolidation loan provider.

With each separate existing loan you look to pay off with your consolidation loan, check whether there are any early repayment charges – and, if so, factor them into your calculations.

Most debt consolidation loans are unsecured, which means they are issued according to your creditworthiness. If you have bad credit, you may find it hard to get an unsecured loan and you might want to consider loans for poor credit instead.

If you see any loans that are secured, you should be wary of them. A secured loan is when the debt is held against an asset (usually property) – think carefully before securing other debts against your home because your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

Is a debt consolidation loan for you?
 

Advantages of debt consolidation loans:

  • All your debts are in one place: you only have one interest rate to keep track of.
  • Managing debt is more straightforward: you only need to make one payment every month.
  • Your credit rating could improve: once you close other credit card and loan accounts and lenders can see that you are managing your finances responsibly, you could see your rating go up, as long as you maintain your payments.

Disadvantages of debt consolidation loans:

  • You might end up with a higher interest rate: if, for example, you are transferring credit card debts across to a consolidation loan, you could end up paying more interest than if you moved these balances to a balance transfer credit card offering a 0% introductory period on balance periods for several months.
  • Early repayment penalties: some lenders will charge you a fee if you wish to pay off an existing loan before the end of its fixed term. Check your terms and conditions for details on how expensive such charges are.
  • You could end up paying more overall because the term of your loan could be longer.

What's the relationship between location and debt?

Indebtedness is a serious problem for many people across the UK. According to a report by the Money Advice Service, around 8.3 million people in the UK struggle with problem debt.

The areas where most people struggle with debt include East London’s Barking and Dagenham, Newham and Tower Hamlets, while Sandwell and Nottingham also have high proportions of individuals with problem debt. As densely populated inner-city areas, this suggests that indebtedness may skew to an urban demographic.

the uk's most indebted areas

Money Advice Service Data, 2017

https://www.moneyadviceservice.org.uk/blog/are-you-one-of-the-8-3-million-adults-with-problem-debt

http://www.bbc.co.uk/news/business-41318655

 

Things to note when taking out a debt consolidation loan

When consolidating debts, work out how big a loan you will need and check the interest rate, as rates are usually tiered depending on how much you borrow. As a general rule, rates are lower the more you borrow, but don’t forget the golden rule: never borrow more than you can afford to repay.

If you think you might be able to pay off your debt consolidation loan early, check to see if there are any penalties for doing this. Remember that the longer you take to pay it off, the more interest you will pay overall.

Who needs higher debt consolidation loans?

Age plays a big role in determining how much people need to consolidate their debts. Young people aged between 18 and 24 tend to require much lower loan amounts than middle-aged people. This is unsurprising: just as income generally rises with age, so do outgoing costs, such as mortgages and credit card debts.

average debt consolidation loan by age

MoneySuperMarket data, correct as of December 2017

 

However, it's also true that young families are particularly vulnerable to debt, which might account for why the 25-44 age band tends to require higher loan amounts.

Interestingly, people who are 75+ require the second lowest loan amounts, possibly due to the long-term financial assets that many older people have. According to CACI*, just 5% of people in this age bracket are over-indebted.

Finding the right debt consolidation loan for you

There are lots of different loans to choose from if you are looking to consolidate debts, so always do plenty of research before applying for one to make sure you secure the best possible deal.

When you compare loans with MoneySuperMarket, you’ll be able to order results by how likely you are to be accepted so you can see who is most likely to say yes. This will help you try and avoid a rejection for credit, which will be recorded on your credit report and lower your credit rating.

Our Eligibility Checker tool performs a soft search, which means there’ll be no record of the search on your credit report. It allows us to use your personal circumstances to see your eligibility for loans – but this is not a guarantee of acceptance and should be used as a guide only.

 

MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers. Please note that loans are only available to people aged 18 and over.

 

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