Consolidating debt is when you take out a single, new loan to pay off several existing debts. This can be a good way of taking control of your finances but you need to be careful. A consolidation loan may not always be your best option.
Before getting a consolidation loan
Before you decide on a consolidation loan, find out what's on offer and what alternatives you've got. These could include:
- trying to make new arrangements with your existing lenders
- checking that you're making the best use of credit options you've already got, such as an overdraft facility, credit or store cards, a personal loan or extension to your mortgage
- borrowing money from relatives
Agencies offering free help and advice include:
If you do decide to take out a consolidation loan, shop around for the best terms from a reputable lender. Building societies and banks may be able to offer you a personal loan.
Getting advice about loans
You should always get independent advice before taking out a loan.
There are many organisations offering free and independent advice to help you find the best way to deal with your debt problem, like Advice NI.Some financial advisers will charge you a fee for their services.
Advantages of a consolidation loan
Used carefully, a consolidation loan can help to put you back in control of your finances.
The advantages can include:
- paying a lower rate of interest – longer-term consolidation loans may be better value than short-term borrowing
- your monthly payments might be lower
- knowing when you'll finish paying off the debt
- you only have to make a single payment each month
- you only deal with one lender
- it may stop you falling behind on payments and getting a bad credit rating
Disadvantages of consolidation loans
Possible disadvantages to a consolidation loan include:
- if the loan is secured against your home, your property will be at risk of repossession if you can't keep up your payments
- you could end up paying more overall and over a longer period
- you usually pay extra charges for setting up and repaying the new loan
- all your eggs will be in one basket - if you get into difficulties, it may be more difficult to come to a new arrangement with a single lender
- if you have a poor credit rating, you may only be able to get a loan at a high interest rate or secured against your home
- if you don’t pay off all your existing debts, you may struggle to make the payments on top of the new loan
How to choose a consolidation loan
Always shop around for the best terms as it will save you money. Make sure you understand all the terms and conditions of the loan and that you can afford to keep up the payments on your consolidation loan.
You should check:
- how long you'll be making repayments and how much you'll pay back in total
- the interest rate and whether it can change
- what the monthly repayments are and what happens if you miss one, for example, you might be charged a penalty
- any penalties or costs you'll have to pay if you want to repay it early
- what happens if it's secured on your home and you can't keep up the repayments
Once you've arranged the loan, aim to keep your finances under tight control, for example, cut up your credit cards and don't let the debt build up again. Be aware that the lender may put pressure on you to borrow more by extending the loan.
You'll be encouraged to take out insurance with your loan. Make sure you're clear about the terms, that you really need the insurance and that you'll be able to claim on it if you need to.
FAQs
No Security for Debt Consolidation Loan
Financial institutions often ask for security or collateral when applying for a debt consolidation loan, especially when someone is having difficulty managing all of their payments. They want to ensure that no matter what, they will get the money back that they have lent out.
Why do I keep getting rejected for debt consolidation? ›
Insufficient credit history or poor payment history can also lead to a denial of a debt consolidation loan. Remember, your payment history is the most important factor in your credit score, comprising 35% of your FICO® Score. Even one missed payment can damage your score.
What is bad about debt consolidation? ›
You may pay a higher rate
Consolidating your debt likely isn't the best move for your finances if you have a low credit score and can't secure a lower interest rate on your new loan.
How hard is it to get a loan to consolidate debt? ›
Check your credit score
Borrowers with good to excellent credit scores (690 to 850 credit score) are more likely to be approved and get a low interest rate on a debt consolidation loan. Ideally, the consolidation loan should have a lower annual percentage rate than the combined interest rate on your other debts.
Can you be denied for debt consolidation? ›
Lenders might not advertise it, but most of them have a minimum credit score required to get a loan. If your score is less than 670, you might be out of luck for a debt consolidation loan. Even if you're over 670, a problematic debt-to-income ratio (more on that below) or payment history could derail your loan.
What is the minimum credit score for debt consolidation? ›
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The minimum credit score needed to secure a debt consolidation loan ranges from 580 to the mid-600s, depending on the lender. The best terms and rates go to borrowers with scores that are around 700 or higher.
Does everyone get approved for debt consolidation? ›
You'll typically need a credit score of at least 700 to qualify for a debt consolidation loan with a competitive interest rate. Although a lower credit score doesn't automatically equal a denial, as some lenders offer loans for bad credit, the borrowing costs will likely be higher.
What are my options if I can't get a debt consolidation loan? ›
If you don't qualify for a consolidated debt loan on your own, you may be able to find a family member or friend who does qualify and get them to co-sign the loan with you. The bank can then qualify you for the loan based on the financial strength of your co-signer.
What loans cannot consolidate? ›
Private student loans are not eligible for consolidation. Learn what to do if you're not sure what kind of loan(s) you have.
Is the National Debt Relief Program Legitimate? ›
National Debt Relief is a legitimate company that has helped hundreds of thousands of people negotiate their debts. The company's debt coaches are certified through the International Association of Professional Debt Arbitrators (IAPDA). National Debt Relief is also a member of the American Fair Credit Council (AFCC).
Outside of bankruptcy or debt settlement, there are really no other ways to completely wipe away credit card debt without paying. Making minimum payments and slowly chipping away at the balance is the norm for most people in debt, and that may be the best option in many situations.
What is a hardship loan? ›
Hardship personal loans are a type of personal loan that is designed to help you overcome financial difficulties. This type of loan is generally offered by small banks and credit unions, and has lower interest rates, lower maximum loan amounts, and shorter repayment periods than standard personal loans.
Can I get a government loan to pay off debt? ›
While there are no government debt relief grants, there is free money to pay other bills, which should lead to paying off debt because it frees up funds. The biggest grant the government offers may be housing vouchers for those who qualify.
What qualifies you for debt consolidation? ›
Debt Consolidation Requirements
Lenders regard your credit score as the most obvious sign of your creditworthiness. If your score is above 740, you're definitely creditworthy. If it's between 670-739, you probably qualify, but may pay a slightly higher interest rate.
Will a debt consolidation ruin my credit? ›
Debt consolidation will only hurt your credit if you can't afford your new payments and fall behind or miss them completely.
