Debt consolidation loans guide

What is debt consolidation?

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Find out if debt consolidation loans could help simplify your debts with our helpful guide

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Do you have several debts with different providers? Do you find them stressful to juggle? One option to tackle this is to take out a debt consolidation loan and put all of your debts under one roof.

Combining all your debt will enable you to make one payment per month, rather than lots of smaller repayments on your debts. You might find it easier to keep track and stick to a budget.

What is debt consolidation?

Debt consolidation essentially means you pay off all your separate existing debts using one singular (and larger) loan. Debt consolidation does not mean that your debts will be paid off, and it won’t make them disappear; it is simply a way to transfer multiple different debts to one lender.

According to MoneySuperMarket data collected between January and October 2018, the most common age group to take out a consolidation loan was those between 25 and 44. According to the same data, this age group take out an average of £12,092.

Streamlining your debts in this way means you will make one repayment to one lender, instead of several payments to different lenders.

Debt consolidation loans by age

MoneySuperMarket data collected between January and October 2018.

How does debt consolidation work?

For debt consolidation to work, you need to get a loan large enough to cover the sum of all your existing debts. When your loan is approved, you use this money to pay off your existing debts with each individual lender.

Now you can concentrate on repaying your one remaining loan (the consolidation loan), and all your current debt is located in one place.

Will debt consolidation affect my credit score?

If you miss a repayment on any of your debts, it will have a negative effect on your credit score. Debt consolidation means you only have one repayment to keep up with, rather than several.

Having only one repayment to keep track of might reduce the chances of you missing a repayment, so could have a positive impact on your credit score.

Applying for a consolidating loan will create a hard check on your credit report. If you apply for several consolidation loans in a short space of time, this will have a negative effect on your credit score.

This is because it might lead a lender to believe that you are overly reliant on credit, and therefore a higher risk borrower. 

Loan purposes by age group

MoneySuperMarket data collected between January and October 2018.

Ultimately, if you manage your debts responsibly, properly and in a timely fashion, your credit score should improve. A better credit score gives you access to cheaper borrowing.

Will debt consolidation save me money?

It’s possible, but not a certainty. If you have several different debts, it’s likely that they will have different rates of interest. If you combine your debts with a consolidation loan, you should choose one with an overall lower rate of interest, meaning you will pay back less money in the long term. 

Average size of a debt consolidation loan

MoneySuperMarket data collected between January and October 2018.

If consolidating your debts would result in you paying back a higher amount in interest, it’s probably not the best option for you.

The pros of debt consolidation

Debt consolidation might feel like the right choice for you, but it’s a decision that shouldn’t be taken lightly. Take time to consider the advantages and disadvantages and how these might play out in your situation. The pros of debt consolidation are as follows:

  • Reduced admin: If you have several debts spread across different lenders, debt consolidation will reduce your administration
  • Clear budget: Having one monthly repayment might make it easier for you to stick to a monthly budget
  • Potential savings: If your new rate of borrowing is lower that your original rate, you could reduce the overall amount you have to pay back
  • Potential to boost credit score: Streamlining your bills might reduce your chances of missing a repayment, and therefore have a positive effect on your credit score

The cons of debt consolidation

  • Not always a money-saver: If you’re not careful, you could end up paying a higher rate of interest on your consolidation loan. Or perhaps you might agree to a much longer term, which would mean you would ultimately pay more interest
  • Potential for more debt: If your consolidation loan amount is larger than your existing debt, there would be a temptation to get into even more debt
  • Fees: If you are considering a debt consolidation loan, you need to take into account any consolidation fees or administration fees. You should also find out if there any early repayment fees on your existing debts

According to MoneySuperMarket data taken between January and October 2018, the most popular month to take out a debt consolidation loan is January, and the least common is September.

After the indulgences of Christmas, some people might find themselves with more debt than at other times of the year, or perhaps taking control of your finances is a popular new year’s resolution.

When do people take out debt consolidation loans

MoneySuperMarket data collected between January and October 2018.

Whatever the reason, if you're battling a mountain of debt there are other options you can consider aside from taking a consolidation loan.

There are several charities that offer free advice, such as the Consumer Credit Counselling Service (CCCS) and National Debtline. So speak to an adviser there who will help find the best solution for your situation.

Comparing debt consolidation loans

If you decide to consolidate your debts, it’s important to compare what’s out there. Different lenders will offer different amounts, loan terms and different rates of interest, so it makes sense to shop around and pick the loan that best suits your circumstances.

MoneySuperMarket’s loan comparison tool lets you see consolidation loans from a range of different providers, so you can get a clearer picture of what’s available.

Our tool will also give you an eligibility rating, so you can see how likely it is that you would be accepted for each loan. This helps to reduce any impact an application would have on your credit report.

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.

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