The What, When, Why and What Ifs of Debt Consolidation Loans

March 22, 2018

Are you facing serious consequences because you aren’t able to keep track of all your different borrowings? Missing some payments because there's too many to keep track of?

Threats of house repossession, court action and nasty phone calls all ring a bell? A debt consolidation loan might be the solution to simplify and streamline who you are having to deal with.

The What, When, Why and What If’s of Debt Consolidation Loans 2If you are struggling to keep track of and repay several debts with different creditors, then hang on as we dig into what a consolidation loan is, when it’s appropriate and what alternatives are out there if you’re struggling to manage all your debt repayments.

Before we start, we should mention that if your debts will take more than 6 years to pay off, you should consult a personal insolvency practitioner (PIP) as they might be able to offer you a better solution.

What is a debt consolidation loan?

Say you’ve got three credit cards, a hire purchase agreement and a payday loan. Each month you receive five separate bills for five separate debts with five separate finance terms.

With multiple debts to multiple creditors, many find it difficult to keep track of what they owe and whether the finance terms are competitive

That’s where a debt consolidation loan comes in.

A debt consolidation loan is a new loan you take out to pay off all of your other repayments and merge the debts into one place.

What would've been five different loans from five different providers is now one loan from one provider.

When should you use a consolidation loan?

Struggling with debt? Call Insolvency Help Ltd

While debt consolidation loans might sound like a simple solution to a complicated financial situation, it’s important to remember that the grass is not always greener. Before you decide on any significant financial action, you should always consult a debt advisor or a personal insolvency practitioner.

And if you’re not sure where to go for advice, check out The Money Advice Service’s free advice finder.

As a rule of thumb, you should only consider a debt consolidation loan if:

  • You can afford the repayments of the combined loans
  • You have intentions of improving your spending habits and budget management
  • You can clear all of your debts with one loan
  • The interest you’re paying for you consolidation loan is less than the rates on your other debts

Why should you use a debt consolidation loan?

There are some good benefits to a consolidation loan, but as with most things finance, it’s of utmost importance that you read the terms and conditions carefully.

Overall, most debt consolidation loans have following benefits:

Lower interest rates

A lot of the time, combining a group of high APR loans into a consolidation loan can save you quite a bit of money.

For example, if you go from having five credit cards charging 17% APR to having just one home equity loan with 6%, you will save money on your interest.

Simplification

Being in debt can cause a lot of stress. Not only are you trying to manage several accounts that need to be repaid but you’re likely to be dealing with a bunch of letters and unpleasant phone calls.

A debt consolidation loan means you have just one creditor and one loan to repay, which makes the whole deal a lot more manageable.

Preservation of credit score

As opposed to other debt solutions, consolidation loans do usually not affect your credit score unless, of course, you are unable to repay it. If you fail to repay your loan, it will damage your credit score just like any other defaulted loan.

For many, the alternative to the proactive solution of a consolidation loan is neglecting repayments. As soon as you start missing repayment deadlines, your credit rating will be dragged down jeopardising future loans and mortgages.

Fixed payoff

On most unsecured debts like credit cards, the interest rates can go up and down.

In a traditional consolidation loan, there is a fixed interest rate, which means you know exactly how much you have to pay at any point in the repayment.

Balance transfers

Solutions such as balance transfers where you start a new credit card to pay for an outstanding balance on another card can often save you quite a bit but only if you know what you are doing.

First, the APR of the new card must be lower than the existing one for this to be beneficial.

Second, you need to keep in mind that applying for a bunch of cards with low introductory rates can negatively affect your credit rating.

That said, as banks generally compete for your business, you can often get low rates of interest for the first half year or up to 12 months.

After the introductory rate you need to be careful as the rates will often rise significantly. This sudden rise in interest rate can easily make your loan unaffordable.

Consolidation loans Ireland

Why you need to be careful with debt consolidation loans

First and foremost, loan repayments are based on your debt and doesn’t take your financial circumstances into consideration. Insolvency agreements are the exact opposite. You only pay what you can reasonably afford, irrespective of the total debt. Check out our debt repayment calculator to see what you would be paying each month.

As you take a consolidation loan, your other accounts will stay open unless you actively contact the provider to close these accounts. If you’re not planning to change your lifestyle and spending habits then chances are you’ll be back in the same situation in a matter of months or years. This time with a consolidation loan and extra debts.

The debt consolidation loan can be a good solution to a smaller or medium-sized debt problem as long as you are determined to tidy up your budget and change your spending behaviour.

However, if you consolidate all your existing debts and then fall back into bad habits, you can end up with a serious debt problem on your hands

Although the interest rates might look reasonable right now, you need to consider whether this is a sum that you will actually be able to pay month after month, year after year. If you are in doubt about this, you should contact a PIP!

What if I can’t get a debt consolidation loan?

If you’ve got a lot of bad debt and as a result a poor credit rating, you might not be able to qualify for the consolidation loan in the first place.

If you’ve already stretched your debt-to-income ratio on some of the accounts you’re trying to consolidate, then you will struggle to qualify for a consolidation loan.

If you’re beyond the point where a debt consolidation loan is an option, there are four major debt solutions (all of which we offer here at Insolvency Help.)

Debt relief, debt settlement arrangement, personal insolvency arrangement and bankruptcy.

Not sure which is right for you and your debts? Get in touch today and we’ll help you decide your next step.

Insolvency Help is a trading style of 180 Advisory Solutions Ltd


Barry Stewart is authorised by the Insolvency Service of Ireland to carry on practice as a personal insolvency practitioner(authorisation number PB00282). Barry Stewart is also authorised to act as an insolvency practitioner in the UK by the Institute of Chartered Accountants Scotland.