Debt consolidation loans

If you’ve got lots credit commitments from different lenders, you can look at putting them all into one loan. 

You do this by borrowing enough money to pay off all your outstanding deb ts  and pay what you owe to just one lender. 

There are two types of consolidation loan: 

• Secured – where the amount you’ve borrowed is secured against an asset, usually your home. If you miss repayments on what are often called ‘homeowner loans’, you could lose your home.
• Unsecured – where the loan isn’t secured against your home or other assets. 

Consolidating your repayments makes sense if: 

• it clears all your outgoing payments
• the total amount payable is less than it was before 
• you’re paying less interest than you were before 
• any savings aren’t wiped out by fees and charges, such as fees for paying off existing loans early or paying a company to arrange the new loan 
• you can afford to keep up payments until the loan is repaid
• you use it as an opportunity to cut your spending and get back on track.

Another option to a secured homeowner loan might be a 0% or low-interest balance transfer card. You’ll need to find out if a fee will be applied to the balance transferred. 

This can be the cheapest way, as long as you repay the money within the interest-free or low-interest period. 

You’ll probably need a good credit score to get one of these cards, and might have to pay a balance transfer fee. 

You might be able to consolidate your repayments into an unsecured personal loan, but again, you’ll need a good credit score to get the best deals.

A consolidation loan is just one way to repay debt.

There are some things you need to do before you take out a consolidation loan. These include: 

• talking to your creditors 
• creating a budget
• finding out if you can do a 0% balance transfer to another credit card to help reduce the cost of your borrowing
• if you have savings, working out if you’d be better off using them to repay early 
• shopping around – comparison websites can be useful for finding the best deal 
• looking beyond the advertised interest rate compare the annual percentage rate (APR), or the annual percentage rate of charge (APRC) for secured loans. The APR is the interest you’ll be charged, and the APRC will include the extra costs such as an arrangement fee. 
• if you need help sorting out your debts rather than a new loan, a debt adviser might be able to negotiate with your creditors and arrange a repayment plan, or a Debt Management Plan

But watch out for: 

• consolidation products that make unrealistic promises – if you are advertised a new monthly payment that is drastically lower which seems too good to be true, it may be! 
• products which promise to instantly repair your credit score or make you debt free overnight - consolidation loans are another form of lending and it is important that you continue to pay on time and are able to set a manageable budget that does not require you to take out additional lending to do so 
• providers that charge upfront fees or consultation fees.