What is a debt consolidation loan?
In simple terms, debt consolidation loans are used to pay off your existing debts. If you use a debt consolidation loan to pay off all your other debts, you’ll owe money to just one lender, helping you to manage your money more easily and reduce your monthly outgoings.
If you currently owe money on several financial products like credit cards, an overdraft, a personal loan or store cards, a debt consolidation loan could help you by saving money on the amount of interest you’re paying.
A debt consolidation loan can also lower your monthly repayments by consolidating all of your existing debts into one single repayment each month.
How do debt consolidation loans work?
A debt consolidation loan won’t reduce the overall value of your debts, but it can help you to budget better because you’ll only have one monthly repayment to consider.
Applying for a debt consolidation loan may also help you work towards a goal of becoming debt free. Unlike credit cards, you cannot roll over your debt every month by making only minimum repayments. As long as you make all of the repayments on your loan, you will repay all of the debt you consolidated within your chosen repayment period.
It’s important to work out if you’ll actually save money by consolidating your debts by looking at the APR of your existing debts and comparing that to the APR of a debt consolidation loan.
You should also check the terms and conditions of your other financial products to make sure your providers won’t charge you an early repayment fee or penalties on any existing loans you may have.
Are there different types of debt consolidation loans?
There are two different types: secured debt consolidation loans and unsecured debt consolidation loans.
A secured debt consolidation loan is money you borrow secured against an asset that the lender will use to reduce the risk of lending to you. The asset is usually your home, which you risk losing if you cannot repay what you’ve borrowed.
At My Community Finance, you can apply for an unsecured loan with one of our partner credit unions, which means you don’t need to be a homeowner.
How to get a debt consolidation loan
Once you’ve worked out if a debt consolidation loan is right for you, you can apply via one of our partner credit unions.
When you apply for a loan via our broker website, you'll need to fill out our online application form.
See below every step you’ll go through when applying for a loan via our website:
- First, you need to decide how much you want to borrow and over what time period you want to pay it back. The credit unions we work with provide loans between £1,500 and £25,000 and payback periods from 12-60 months.
- You’ll then request a personalised quote. To provide you with this, we’ll perform a soft credit check which won’t affect your credit score, and only you’ll be able to see a record of it on your credit report.
- If you pass the eligibility criteria set by our partner credit unions, we will let you know the APR you will be offered - your personalised quote is valid for 30 days.
- We will then send you a loan agreement, coupled with terms and conditions of the loan contract, for you to review to ensure this is the right product for you. Once you have read and are happy with the terms of the loan you’ll sign your loan agreement.
- To complete our final checks, we will then conduct a hard credit search on your credit report, which other lenders or any organisation with access to your report will be able to see.
- The credit union will aim to make a final decision about your personal loan within two working days. If successful, you should receive your money within approximately four working days of your application.
Am I eligible for a debt consolidation loan?
In order to apply for a debt consolidation loan with one of our credit unions, you’ll need to:
- Be between the ages of 21 and 65
- Live in the UK (excluding Northern Ireland, the Channel Islands and the Isle of Man)
- Be employed and earn at least £18,000 a year
We will match you with a credit union who will assess your eligibility.
What can I use a debt consolidation loan for?
A debt consolidation loan is designed to pay off your existing debts from other lenders, combining everything you owe into one loan, helping to lower your monthly repayments and reduce the amount of overall interest you pay.
A debt consolidation loan can be used to pay off different types of debt, including credit cards, personal loans, store cards and overdrafts.
For example, some people use a loan for the sole purpose of expensive credit card debt consolidation, which can help to reduce the amount of interest they pay significantly.
How much can I borrow for debt consolidation?
How much you'll be able to borrow will depend on your personal circumstances; however, the loans our credit unions offer start at £1,500 and go up to £25,000 over 12-60 months.
How much does a debt consolidation loan cost?
This will depend on your personal circumstances. The cost of a loan can vary depending on several factors, including:
- Annual percentage rate (APR) - How much interest you’ll pay on top of the amount you borrow, which can be impacted by your credit history.
- How much you want to borrow - The amount you need will depend on how much you owe to other lenders.
- Loan term - How long it will take you to pay off the loan.
Is a debt consolidation loan a good idea?
If you want to discuss the pros and cons of applying for a debt consolidation loan, you can get free, impartial advice from MoneyHelper, Citizens Advice or StepChange.
There are benefits and drawbacks of taking out a debt consolidation loan.
Benefits
- Combine all your debts into one place
- Help to lower your monthly repayments
- It can help to reduce the amount of interest you pay on your existing debts
- More manageable monthly repayments
You should also consider
- You may need to pay early exit fees when you pay off any existing loans with other creditors
- If you choose to extend the terms of your original lending you may end up paying more interest because it will take you longer to pay the loan off.