What is a debt consolidation loan?
A debt consolidation loan gives you the option of consolidating all existing debts into a single loan. Rather than making a number of payments to each individual creditor each month, you instead make one monthly payment to reduce your debt.
If you have outstanding debts with multiple creditors, a debt consolidation loan could make it easier to manage your monthly repayments. Before you apply for this type of loan, you need to make sure it’s right for you and your current financial situation.
How does a debt consolidation loan work?
The best way to understand how debt consolidation works may be to look at an example:
You have a total debt of £10,000 on 3 existing personal loans with different APRs and different terms as shown below:
|Loan 1||Loan 2||Loan 3|
|Remaining repayment term||36 months||18 months||12 months|
|Total to be refunded||£10,872.37||£4,625.02||£2,554.01|
If you continued to repay these loans without borrowing any additional money, you could be debt free in 3 years and would have paid a total of £8,051.40 in the interest.
However, if you choose to take out a one-off loan to repay the £10,000 due over 3 years at an APR of 49.9%, you will only repay £7,566.37 in the interest. In addition, your monthly repayments would go from £771.79 at £487.95.
It is important that you carefully consider the monthly repayments and the total interest you will pay before committing to a debt consolidation loan to ensure that it will leave you in a better financial situation. You should also be sure to check the prepayment charges on existing debts and factor them into your calculations and final decision.
How much can I borrow?
We can help you find a loan up to a maximum of €5,000, provided you meet the criteria of the individual lenders on our panel, with repayment terms ranging from 3 to 60 months (depending on the amount requested). The amount you will be offered will depend on your credit history and other factors determined by the individual lender.
What are the advantages of debt consolidation?
As highlighted above, a key benefit could be that you lower your monthly repayments. A debt consolidation loan may also be able to help by:
Improve your credit rating: Paying off the loan on time each month could have a positive effect on your credit score. As long as you don’t accumulate more credit, you have a better chance of improving your score, which could make it easier to get additional credit later on.
Pay less interest: If your current loans have high APRs, you may be able to reduce the amount of interest you pay each month with a debt consolidation loan. Although you still have to pay interest on your consolidated loan, it could be less than the amount you are currently paying.
What are the risks associated with taking out a debt consolidation loan?
Before agreeing to a debt consolidation deal, you need to make sure that you are able to repay the monthly installments. Take the time to review your own monthly income and expenses and check that you can comfortably afford the repayments without running out of money.
It is possible that taking out a debt consolidation loan will mean that it will take you longer to pay off your outstanding debt. However, it could make repayments more affordable and prevent your credit score from being negatively affected.
What should you consider before consolidating your debt?
Before taking out a loan to consolidate your debts, consider:
- Whether this is the right option for you based on your current financial situation. Debt consolidation may not be suitable, depending on how much you owe and the current interest rate you are paying.
- Consolidating your loan requires a long-term commitment, so you need to make sure you are able to pay the repayments. Missing a payment could negatively impact your credit score.
- The APR of the consolidation loan should not be higher than the combined APR of your current debts, otherwise it will make it more expensive and not beneficial to you, especially if the repayment term is longer. Therefore, you must carefully calculate whether consolidation will put you in a better financial position.
- When you consolidate your debt, it may mean that you are paying off the debt over a longer period than the original terms. It could also force you to pay more interest during the term of the loan agreement.
Should I take out a debt consolidation loan?
If you’re struggling to manage a number of debts that you pay off each month, a debt consolidation loan could help you get back on track.
It could work as an alternative to keeping a record of how much you need to pay each month and when it needs to be paid, which can sometimes be difficult and stressful. Instead, you pay a fixed monthly amount to a single lender so you always know where you stand with your debts.
A debt consolidation loan will always require you to pay additional interest and the full amount must be repaid just like any other type of loan. However, if the loan repayment period is spread over a longer period, you may benefit by paying a lower amount each month. If the duration of your loan is extended, it could increase the total amount of interest you pay, take this into account before consolidating your debts.
Do I have to undergo a credit check?
When you start the application process with CashLady, the first step will have no effect on your credit rating. Our service is completely free and we simply use your information to find the best possible match with a lender most likely to offer you a loan. This initial check won’t change your credit score so you can start your application without worrying that it will have a negative impact.
If you are provisionally accepted by one of our lenders, we will direct you to their website to continue the application directly. They may ask for additional information to support your claim and will do a full credit check before making a final decision. Always be sure to read all the details of the agreement in full before signing and make sure you are comfortable with the repayment terms.
What other checks will the lender perform?
In addition to a full credit check, most lenders will also perform additional checks to make sure you’re a good fit.
Affordability: This is to check that you have sufficient funds each month to repay the loan. They will ask you for information about your monthly income and expenses.
Use: Lenders will want to see that you are working part-time or full-time and receiving a minimum amount of money each month. This may require you to provide employer information and recent payslips.
How to apply for a debt consolidation loan?
After you submit your application, we connect you with a variety of lenders based on the information provided on your application form. We work with a panel of established lenders who are all authorized and regulated by the FCA so that your information and details remain safe.
To start the application, you just need to fill in the form on our website. We’ll ask you a few simple questions about yourself and your income, including how much you earn and what you spend each month. The more information you provide, the more precise our search will be.
This part of the process will not affect your credit score. It can only be seen by lenders reviewing your application and will not influence any future credit application.
After submitting the form, we share it with our loan panel. They’ll decide if they want to proceed with your application, and if so, we’ll guide you to the lender’s site where you can complete the final part of the application. This includes a full credit check before agreeing to offer you a loan to ensure that you are able to comfortably repay the full loan within the agreed time frame.