A consolidation loan involves obtaining a new loan to pay off existing debts to reduce monthly payments at a lower interest rate or to reduce the number of companies who are owed money. There is no debt forgiveness and interest & charges will apply as per the contract of the consolidation loan. You may also have to pay fees for arranging the loan and if you fail to manage payments assets including your home may be at risk.
How do debt consolidation loans work?
With a debt consolidation loan, you move all your borrowing, or a significant chunk of it, from a variety of locations onto a single loan. Rather than making lots of separate payments to different lenders every month, you’ll only have to pay your consolidation loan provider.
What are secured and unsecured consolidation loans?
Secured and unsecured loans have different consequences for you and your finances and therefore it’s important to understand the difference between the two.
A secured consolidation loan is when a debt is secured against your property or other asset. Whilst a secured loan is cheaper, if you cannot pay the loan back, the loan company may see the item the loan is secured against.
Unsecured consolidation loans, aka personal loans, are not secured against your property. If you fail to make payments on your unsecured consolidation loan then your credit rating will be affected.
Is a debt consolidation loan right for you?
Debt consolidation loans aren't right for everyone. It's important to check all of the other options available and make sure you're making the right choice.
While consolidating debt often sounds like a promising solution, this could make your situation worse. That's why it's best to get expert debt advice before taking out a consolidation loan.