A debt consolidation loan could help you streamline multiple debts into one place while reducing your monthly repayments and/or the amount of interest you pay.
A debt consolidation loan might not be the best option for everyone, and it’s extremely important to be aware of the risks that could be involved in this type of borrowing.
If you’re worried about your level of debt and would like to talk to a trained advisor, please contact debt charity StepChange for free, impartial advice.
What is a debt consolidation loan?
A debt consolidation loan allows you to combine your existing debts into a single loan. Rather than making multiple payments to multiple lenders every month, you make a single monthly payment to just the one lender.
This could make it easier to manage your monthly repayments and reduce the amount of interest you pay.
How does a debt consolidation loan work?
| Loan 1 | Loan 2 | Loan 3 | |
|---|---|---|---|
| Amount owed | £5,000 | £3,000 | £2,000 |
| Remaining repayment term | 36 months | 18 months | 12 months |
| APR% | 79.5% | 79.9% | 59.7% |
| Monthly Repayment | £367 | £290 | £225 |
| Total to repay | £13,240 | £5,223 | £2,703 |
| Interest paid | £8,240 | £2,223 | £703 |
Repaying these loans in full would take you three years, and during that time, you will pay a total of £11,166 in interest.
On the other hand, if you chose to take out a debt consolidation loan to repay the £10,000 owed, you could pay less interest overall. For example, on a £10,000 loan over three years at an APR of 49.9%, you would repay £9,458 in interest. What’s more, your monthly repayments would drop from £882 to £540.*
Before committing to a debt consolidation loan, it’s important to carefully review the monthly repayments and the total interest you’ll pay to ensure that it will leave you in a better financial position. You should also check any early repayment fees on existing debts and factor these into your calculations.
What should you consider before consolidating your debt?
- Have you done thorough research into this type of borrowing? It’s important to be confident that a debt consolidation loan is suitable for your circumstances.
- You should carefully calculate whether consolidating debt will put you in a better financial position. The interest you’ll pay on the debt consolidation loan should be less than the combined interest you’re currently paying on your existing debt(s).
- Consolidating your loan requires a long-term commitment. Can you afford the repayments? Missing a payment could have a negative impact on your credit score.
- When you consolidate debt, it could mean that you’re repaying the debt over a longer period than the original term(s).
What are the risks of taking out a debt consolidation loan?
There are risks involved when taking on any type of credit.
Before you consider a debt consolidation loan, you should make sure you are able to afford the monthly repayments, which will include interest.
Repaying a loan should never leave you unable to cover the cost of your necessary monthly outgoings, such as your housing, bills, and food.
As discussed, a late or missed repayment will cause your credit score to decline, which could affect your chances of being considered for credit in the future.
Taking out a debt consolidation loan could mean that you’ll take longer to pay off your outstanding debt; however, this could make the monthly repayments more manageable.
Will my credit score be affected by a debt consolidation loan?
Yes; any credit product you have will affect your credit score. If you repay your debt consolidation loan on time each month, you could notice an improvement in your credit score over time, although you’ll need to make sure that you’ve also kept up to date with any other existing credit commitments and bills.
Late or missed repayments will harm your credit score, and your lender could also charge you a late payment fee. If you’re struggling with your repayments, you should contact your lender as soon as possible. They will be able to discuss any options that could be available to help you.
Will I need a credit check if I apply for a debt consolidation loan?
All authorised and regulated lenders in the UK must carry out a creditworthiness assessment on anyone who applies for credit. This is in line with Financial Conduct Authority (FCA) regulations, which are designed to protect you by ensuring that you can afford to repay the money you’ve applied to borrow.
You can search for a debt consolidation loan with CashLady without impacting your credit score. CashLady uses soft search technology, which will not leave a mark on your credit file or affect your score.
If you’re matched with a loan and choose to make a full application, the lender will complete a creditworthiness assessment. A creditworthiness assessment will include a hard search or an Open Banking check. Please be aware that a hard search will be visible on your credit file for up to 12 months, and multiple hard searches in a short period of time will harm your credit score.
How much could I borrow?
CashLady is a credit broker, and we could help you search for a short-term debt consolidation loan between £100 and £10,000. It’s important you do not borrow more money than you need to or can afford to repay.
Depending on the amount of money you’re approved to borrow, you could repay your debt consolidation loan over a term between 3 to 60 months.
How do I apply for a debt consolidation loan?
Using CashLady’s credit broking service to search for a debt consolidation loan is straightforward. We’ve outlined the journey below to give you an idea of what to expect.
1. Tell us how much money you need to borrow and choose a repayment term.
2. Fill out our five-minute online form, providing us with some basic information about yourself and your financial position.
3. In just 60 seconds, we’ll scan our panel of 30+ lenders to search for a suitable debt consolidation loan for your circumstances.
4. If we’re able to match you with a loan, you’ll be redirected to the lender’s website, where you can find out more and decide whether you’d like to make a full application.
5. If you choose to make a full application, the lender will carry out a creditworthiness assessment, which will involve a hard search or an Open Banking check. If you pass the creditworthiness assessment, you’ll be formally offered the loan.
How soon will my debt consolidation loan be sent?
If approved for a debt consolidation loan, your money could be sent the same day, although it’s important to be aware that payout timescales vary between lenders.
The time it takes for the money to become available in your account will depend on your bank’s policies and procedures.
What to do if you’re worried about money
Please know that you can speak to any of the following charities and organisations about money and debt-related concerns: StepChange, MoneyHelper, Citizens Advice, and National Debtline. Each of these organisations can provide you with free, confidential advice.
*We use the following loan repayment calculator: https://www.moneysavingexpert.com/loans/personal-loan-calculator/
Please note that the calculations have been provided for illustrative purposes only.
