Debt consolidation loans explained

23 April2021

Consolidating your debts simply means bringing several existing debts together, with the intention of making your finances easier to manage on a monthly basis.

If you're comfortably making your payments to all your outstanding debts every month, but you want to make the way you repay them a bit more straightforward, taking out a debt consolidation loan could be your ideal approach.

Let's take a look at exactly how debt consolidation loans work - and how one could simplify the way you repay your debts.

What is a debt consolidation loan?

A debt consolidation loan is a new loan that you could take out, large enough to cover your existing debts.

Different lenders will offer different interest rates on consolidation loans, so it's important to compare loans and get the best possible rate before you make a final decision. There should also be some flexibility when it comes to how quickly you arrange to repay the loan (more on which below).

We could answer any more questions you have about debt consolidation loans here.

How does a debt consolidation loan work?

By taking out a debt consolidation loan, you'll essentially combine several debts into one. As a result, rather than making several repayments per month to different lenders, you'll have just a single monthly payment to make every month - to just one lender.

If you've found that keeping on top of several debts has been harder work than you'd thought it would be, consolidating your debts with a loan could provide a simpler way of dealing with your debts - and make it less likely you'll miss any payments (which could damage your credit rating and lead to financial problems).

How could a debt consolidation loan reduce my outgoings?

Another advantage of taking out a debt consolidation loan is that there's no defined repayment period for all loans: there's quite a bit of flexibility in terms of how quickly you agree to repay the loan.

If you want to clear the loan faster, and you're confident that you're in a financial position to do so, you can make larger monthly payments towards the loan.

On the other hand, in the current climate, many of us are doing everything we can to rein in our spending and stick to tight budgets. If you're in this position, repaying the loan over a longer time period could help you to reduce your monthly outgoings, as each payment you'll make towards the loan will be smaller.

Although making smaller payments could cost you more overall due to the interest that will build up, you may feel that this is a price worth paying if it helps you 'free up' some money in your monthly budget for other costs.

You can find out how much your monthly payments towards a debt consolidation loan could be with our easy-to-use debt consolidation calculator.

Debt consolidation loans: things to consider

Here are a few final things to think about before agreeing to take out a debt consolidation loan:

  • If you secure the loan against your home, failing to keep up with your repayments could lead to your home being repossessed.
  • Consolidating your debts with a loan will 'free up' credit/store cards, overdrafts and other forms of credit - and if you borrow any further money, you'll have these new payments to make as well as your loan repayments.

We can let you know if a debt consolidation loan could be right for you: just fill in our quick form.

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Tags: debt, debt consolidation, debt consolidation loans, debt advice, budget, credit rating, money, debt help

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