What is a Debt Consolidation Loan & How Does it Work?

There are a whole host of options when it comes to dealing with your debts. Taking a new loan out to deal with your current loans might sounds like a bad idea, but there are some distinct benefits to doing so, if you choose to.

A debt consolidation loan is one of these options, allowing people to simplify their debt situation. At The Mortgage Heroes, we understand the distinct impact that debts can have on your life, your credit score and getting a mortgage. That’s why our team has put together this guide to debt consolidation, designed to help you make an informed decision when considering your approach to debt.

What is a Debt Consolidation Loan?

Debt consolidation does exactly what it says on the tin – it consolidates all of your current debts into one that can be managed with a single monthly payment.

This is achieved by borrowing enough money to pay off all of your current debts. Once this is done, you’ll owe money exclusively to a single lender, which many people find is much easier to manage in the long run. There are two distinct types of debt consolidation that you might consider:

Unsecured Debt Consolidation

An unsecured debt consolidation loan is a personal loan that allows you to pay off other outstanding debts without risking a high-value item (such as your car, or home) as collateral. Generally speaking, these loans allow you to borrow up to £25,000.

These loans are more likely to be accepted on lower values, and if you’re a lower-risk borrower.

Secured Debt Consolidation

If you need to borrow over £25,000, or if you’re finding it difficult to find an unsecured loan as a result of poor credit history, or for any other reason, a secured debt consolidation loan might be a better fit for you.

For a loan to be ‘secure’, lenders will use collateral as a safety net to ensure that they’ll get their money in the event that you can’t pay. For example: if you offer your car as collateral, if you miss payments, the lender might repossess it as a way to ensure full payment. If this is an option you’re considering, you should make sure that the monthly payments are affordable – take plenty of time to research to find exactly the right loan for you.

What are the Main Benefits?

There are a whole host of benefits if the consolidation loan is managed correctly:

  • You may be able to find a loan with a lower interest than what you’re paying individually. This will save you a good deal of money in the long run.
  • Paying for a single loan is far less stress than trying to manage lots of smaller monthly payments. Debt consolidation loans can streamline the process and take some of the frustration out of your debts.
  • By having a single monthly payment, you’re less likely to miss it. This can help to protect your credit score.
  • Budgeting becomes much easier with a consolidation loan, as you know exactly what you’ll be paying every month.

What are the Risks?

Debt consolidation loans aren’t foolproof, though. It’s worth being aware of the risks before you commit:

  • If your consolidation loan is over a longer term, or has a higher interest, you’ll end up paying more over time.
  • When working with large initial debts, you might end up taking out a consolidation loan which is significantly larger than your original debt.
  • Some loans come with hidden set-up fees.
  • A consolidation loan leaves a footprint on your credit report. This may negatively impact your credit score (although remember that by not missing a payment, you will help protect it; this is a double-edged sword).

Who Can Benefit from a Debt Consolidation Loan?

A consolidation loan isn’t something to be taken out lightly. You should consider carefully whether it’s a suitable option for your specific circumstances. For example: if you only have a few debts at a good APR, then a consolidation loan might not be the best course of action, because this is perfectly manageable, and you should focus on your existing repayment plans.

Most consolidation loans are designed to handle debts where people owe multiple lenders. If you’re not careful, you might find yourself owing more money to a single lender. This isn’t always the case, though.

If you owe money on a handful of high-interest loans, then consolidating these loans into a single, lower interest loan could be a financially sound decision. When considering anything of this nature, it’s always worth consulting with a financial advisor to discuss your unique situation before proceeding.

Alternatives to Debt Consolidation

Sometimes, taking out additional loans isn’t the best idea, especially if you feel that it will encourage you to borrow even more on top.

Many people with debt will often create a debt management plan, where a debt advisor will negotiate a payment plan with your lenders to help you keep on top of everything, and to help keep interest rates down. Make sure to consider all of your options before taking out additional loans.

Struggling to Get a Mortgage? The Mortgage Heroes Can Help!

If you’ve struggled with debt in the past, it might have had a negative impact on your credit score. Finding a mortgage can be really difficult, as lots of lenders see this mark on your history and will refuse to deal with you.

But all is not lost! At The Mortgage Heroes, we believe that everyone deserves a chance, and that a bad credit score doesn’t mean that you can’t pay off a mortgage. We support people of all backgrounds to find the right mortgage, no matter the situation, be that bad credit mortgages, declined mortgages, and much more.

Our heroes are on hand 7 days a week, just give us a shout today and we’ll get the ball rolling.

Secured loans and unsecured loans are available by referral only.

Think carefully before securing your debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

We can help you find a mortgage. Contact a mortgage hero today.

01275 405 050

Heroes available 7 days a week!