Should I consider a debt consolidation loan to help with debts?

Can a debt consolidation loan help me to become debt-free?

If you’ve been trying to repay multiple debts but feel that you’re not making headway, a debt consolidation loan may help you to become debt-free. There are two types of debt consolidation loan – secured and unsecured.

A secured loan means the lender will use a valuable asset as security, such as your home if you’re a homeowner. Although a secured loan may offer lower interest, it places your home at risk if you cannot keep up the repayments.

An unsecured debt consolidation loan typically attracts higher interest rates, but doesn’t require an asset to be used as collateral. There are some benefits and drawbacks to consolidation loans in general, so how do they work?

How does debt consolidation work?

If you owe debts to several creditors, such as credit card providers and your bank, you may be finding it difficult to keep up with repayments. Additionally, if you only make the minimum payment to your credit cards, the additional interest quickly increases the amount you owe.

Add to this the demands of a bank overdraft and personal loan, for example, and your debt situation can quickly spiral out of control. Debt consolidation amalgamates this unsecured borrowing into a single loan.

You then pay one monthly amount to the debt consolidation loan, instead of multiple payments to credit card providers and other lenders. So how could a debt consolidation loan benefit you?

What are the advantages of consolidating your debts?

Fixed interest and loan term

You pay a fixed interest rate for a defined period of time, rather than different interest rates for each form of borrowing.

Certainty of budgeting

Knowing how much you have to pay towards the debt each month helps you to budget more effectively.

Lower interest rates

If you have a good credit score, you may be able to lock in a lower interest rate than was attached to your previous borrowing.

Improved credit rating over time

Debt consolidation can boost your credit rating in time, if you make each payment in full and on time.

Disadvantages of consolidating your debts

There are downsides to debt consolidation loans, however, including:

Interest rates can be high

If your credit score is poor, it’s likely that a debt consolidation lender will only offer loans at a high interest rate – potentially higher than your credit card providers – or insist on a secured consolidation loan that could place your home at risk.

You shouldn’t take on more debt

Debt consolidation can help you pay off your debts as they stand now, but it’s vital not to incur further debt during the loan term or afterwards, otherwise your financial situation could become very difficult to manage.

When should you consider debt consolidation?

Consolidating your credit card debts and other borrowing might be a good idea if you’re sure you can keep up repayments to the new loan, and won’t need to take out credit or further borrowing.

It may also be a good choice if your credit score is low and you have a positive history of repayments, as this can reduce the interest rate charged on debt consolidation loans. Also consider whether the savings you’ll make will exceed the fees and charges made on these loans.

For more information and professional advice on whether to consider a debt consolidation loan, please get in touch with our expert team at Scotland Debt Solutions. We can offer free, same-day meetings, and operate offices around Scotland.