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Debt Consolidation Loans

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What is a debt consolidation loan? 

A debt consolidation loan is a type of loan that's used to combine all your existing debts into one pot. All you’ll need to do is apply for a loan for the amount you owe in existing debt and if approved, you can use the funds to pay off your other borrowing. You’ll then pay off the loan over time, usually in monthly repayments.

Do I need a debt consolidation loan? 

You might find yourself in a position where you’ve accumulated different types of debt. This is where a debt consolidation loan comes in handy because you can use it to combine all your existing debt into one pot. According to MoneySuperMarket data, the average amount that someone borrows for a debt consolidation loan is £10000.00i. With this type of loan, you then pay off your combined debt over time, usually in monthly repayments.

How do I consolidate my debt? 

A debt consolidation loan lets you move your existing debts to one loan, so you only need to make one monthly repayment. Here’s how it works: 

1. Work out what you owe 

Look at your existing debts. Calculate the total value of the loan you’ll need to cover these existing debts and borrow that amount. 

2. Pay off debt with the loan 

You’re now able to pay off your existing borrowing with just one loan, which will reduce the number of repayments you have to make each month. 

3. Pay back the loan 

Pay back the consolidation loan within the set term. Having just one monthly repayment could make things easier to manage. 

What can I use a debt consolidation loan for?

A debt consolidation loan can be used to pay off different types of debt, including: 

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    Credit card debt

    Many credit cards charge high APRs making them an expensive way to borrow long-term

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    Personal loan debt

    Unsecured loans are often taken out to fund a car purchase, home improvements or a holiday 

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    Overdraft

    Most banks charge high interest rates on overdrafts which, over time, can lead to a big debt 

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    Store card

    While some store cards offer up-front discounts on spending they often have high APRs and fees

What are the pros and cons of a debt consolidation loan?

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    Pros:

    Reduce your monthly repayments
    This works particularly well if you have quite a few outstanding debts accruing interest

    Easier to keep track of your debt
    Managing one payment a month is more straightforward than several at once

    Boost your credit score
    It's easier to make one repayment every month, and doing so can improve your score

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    Cons:

    Missed payments have consequences
    You will damage your credit score if you don't make your repayments in full each month

    You may lose your home or car
    If you can’t keep up with the repayments on a secured loan your home or vehicle could be repossessed

    Other options are available
    For example, a 0% balance transfer credit card may suit someone with more modest debts

Your credit score plays a part in the deal you get

When you apply for a loan, the lender will use your credit rating to decide whether to accept you, and what rates to offer you. Find out where you stand with our free Credit Monitor tool

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How much will it cost to consolidate my debt?

Debt consolidation loans are designed to help you manage your existing debt, so the loan will need to cover your existing debts’ value. How much a debt consolidation loan will cost will depend on several factors:

Loan amount

This will depend on the value of the debts you plan to consolidate

Term

 How long you intend to borrow (the average term is 4 years)

APR

 This is the loan interest rate plus any other charges like annual fees or arrangement fees

Any extra fees

Providers may charge a settlement fee if you pay the loan off early

Can I get a debt consolidation loan with bad credit?

If you’ve struggled with debt in the past and have a low credit score you may not be offered the best loan deals.

But the good news is that there are specialist providers offering debt consolidation loans for bad credit.

Because you don’t have the best credit score, you may be offered a secured debt consolidation loan.

Remember that with this type of loan, if you don’t keep up with payments, you risk losing your home.

Representative 29.9% APR

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Victoria Russell

Our expert says

"

Consolidating debt could be the right option if you’re struggling with high interest rates and not clearing what you owe quickly enough. Before you apply, just make sure you’re happy with the terms of the new loan, including how much you’ll be paying each month and for how long.

"
- Victoria Russell , Money & Personal Finance Expert

How to compare debt consolidation loans with MoneySuperMarket

We’re here to help find the right loan for you, so we’ll tell you which rates you’re guaranteed to get. 

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    It doesn’t take long

    Tell us a little about yourself, your finances and the loan you want

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    We’ll browse the market

    We’ll search through loans from a wide range of lenders on the market

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    Compare loans

    You’ll be able to sort loans by the overall cost and the likelihood you’ll be accepted

Many standard personal loans can be used for debt consolidation. However, some lenders prefer you to use their loans for specific purposes such as buying a car or renovating your home, so it’s worth checking this before you apply. If you have a lot of debt, you may also find it harder to qualify for a low-cost personal loan. 

Whether or not a debt consolidation loan is right for you will depend on the sort of debts you have already. For modest credit card debts, for example, a 0% balance transfer credit card could be a good alternative.

If you need to pay back an overdraft, a money transfer card could offer a more attractive interest rate versus a debt consolidation loan.

If your debts are substantial, and you’re struggling to manage the repayments, a debt management plan may be a more suitable solution. 

Most banks offer secured or unsecured loans which can be used for debt consolidation. Make sure you weigh up which loan is the right option for you. While a secured loan may come with a lower interest rate, you are at risk of losing your car or home, for example, if you struggle to keep up with your repayments. 

A debt consolidation loan can be used to combine all your existing debts into one loan payment – making it easier to manage rather than having several payments to different lenders. While a debt consolidation loan won’t reduce the amount you owe, it can make your repayments cheaper if you find a loan with a lower interest rate.

Yes, you can consolidate debt with a credit card. You can do this with a balance transfer card which moves your debt onto to a lower interest rate card.

Whether or not a debt consolidation loan is right for you will depend on your circumstances and financial habits. If you keep up with payments, it can help make your debt more manageable. If you miss repayments, you run a serious risk of drowning in more debt.

A debt consolidation loan can be unsecured or secured. Your credit score can play a part in the type of loan you’re offered. If you have bad credit, you’re more likely to be offered a secured debt consolidation loan.

Applying for a debt consolidation loan can lower your credit score temporarily. When you apply, the lender will carry out a credit check and this results in a hard inquiry which can hurt your credit rating. Hard inquiries can affect your credit rating for a year. If you make your loan repayments on time and clear your debt this will help to improve your credit score.

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