Managing several debts at once can feel like spinning plates. Different payment dates, varying interest rates, and multiple lenders, it’s easy to feel overwhelmed. If this sounds familiar, you might be considering a debt consolidation loan. But how can you get one, and what should you expect when applying?
In this blog, we will break down how you could go about getting one, and the key points to consider before taking the next step.
What types of debt consolidation loans are there?
There are a number of ways to consolidate your debts, including:
1. Remortgaging
If you have a mortgage, you might be able to remortgage and raise extra funds to pay off your debts. This option may offer lower interest rates than other borrowing options. However, it may extend your mortgage term, which could mean paying more interest overall.
2. Secured loans
Alternatively, you could consider taking out a second loan against your home. This approach often allows you to borrow more than an unsecured loan and may offer lower interest rates. These loans are commonly used by homeowners consolidating larger amounts of debt. However, keep in mind that your home could be at risk if you’re unable to keep up with repayments.
3. Unsecured loans
An unsecured loan doesn’t require any security, so approval is usually based on your credit score and affordability. They might be suitable if you’re looking to consolidate smaller debts and prefer not to use your home as security.
Each option has its pros and cons, and the right one for you will depend on your circumstances.
How do you get a debt consolidation loan?
The process is more straightforward than you might think. Here’s a typical step-by-step:
Step 1: Understand what you owe
Make a full list of your debts, including how much you owe, what you’re paying each month, and what the interest rates are.
Step 2: Check your credit profile
Lenders will use your credit history to assess what’s available to you. You can check your credit report online for free, which can give you an idea of what a lender might see.
Step 3: Look at your budget
Work out how much you can realistically afford to pay each month. This may help you avoid overextending yourself and ensure any new loan is manageable for you.
Step 4: Compare your options
Different lenders offer different deals. So, it is important to compare loans and find one that suits your needs.
Step 5: Apply and repay
Once you’ve found the right option, you can apply. If approved, your new loan will be used to pay off your existing debts, and you’ll start making one monthly payment instead.
What should you think about before applying?
Consolidating your debts can be useful, but it’s not the right choice for everyone. Here are a few things to think about before you apply:
Total cost: Even if your monthly payments are lower, you might end up paying more over the life of the loan if the term is extended.
Your home: With secured loans or remortgaging, your home is used as security, so it’s crucial to be confident you can keep up with repayments.
Fees and charges: Check if there are any early repayment charges on your existing debts, or fees for setting up the new loan.
Long-term goals: Think about how this loan fits into your bigger financial picture. Are you planning to move, save, or invest? Make sure the loan supports those aims.
Summary
A debt consolidation loan could help simplify your finances, making it easier to manage what you owe and possibly reducing your monthly outgoings. But like any financial decision, its worth taking time to understand your options and get advice tailored to your situation.
Loans are secured against property - Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
