What is a Debt Consolidation Loan?
A debt consolidation loan is a personal loan, which may be secured or unsecured, that is granted to pay off other smaller accounts/loans. These other loans may be payday loans, credit cards, overdrafts, or any other account where you owe money.
For many people consolidating their accounts makes life easier as they then only have one (1) monthly payment to pay, instead of multiple payments to three (3) or more creditors.
An example may be this:
You have 4 accounts you wish to consolidate and pay off.
* A credit card with a balance of £500
* A credit card with a balance of £2,000
* A personal loan of £750
* A payday loan of £500
In total you owe £3,750, and the total monthly payments are £150, not counting the payday loan as that is expected to be paid in full on your next payday.
By taking out a consolidation loan for £3,750, you pay off all the accounts, including the payday loan, which would be £500 you had to pay back immediately, and you now only have one (1) monthly payment each month.
In addition, depending on the term of the loan, how long you pay the loan back, and the interest rate, your monthly payments will be lower than all the other accounts combined. Plus, you don’t have £500 being taken out of your account in one lump sum to repay the payday loan.
Debt consolidation loans can vary in the amounts borrowed, and also vary in the terms of repayment. The amount you borrow, the term of the loan, and the interest rate, will determine your monthly payments.
Debt Consolidation Loans Can Save You Money
Consolidation loans can save you money reducing the high interest rates that many credit card companies charge. You can also save money when you consolidate payday loans, again due to the high interest rates that are charged.
Some payday lenders charge APR/annual percentage rates of 1500% to as high as 2000%!
In addition, making one (1) monthly payment is much easier than having different payments taken out of your bank account at various times of the month.
One monthly payment on the same date each month, can help you manage your household budget.
Debt Consolidation Can Improve Your Credit
By consolidating a bunch of smaller accounts, such as credit cards and other loans, you can improve your credit and credit score.
One area that affects your credit score is how much credit you have outstanding, the balances on accounts
If you have 5 accounts all with balances on them, and some may be close to their credit limit, this can have a negative affect on your credit score, bringing your credit score down, which is bad.
The higher your credit score is, the better it is.
When you consolidate those 5 accounts to one account, you now only have one (1) open account, not five, and your credit limits are back in place. Having just one open account can improve your credit score, as opposed to having 3, 4, or more open accounts with balances.
Debt Consolidation vs Debt Management
A debt consolidation loan can be a form of money management, by reducing the interest you may pay, and also by reducing your monthly payments, but debt consolidation is not to be confused with debt management or a debt management plan.
Taking out a debt consolidation loan does not have a negative impact on your credit, enrolling in a debt management plan can have a negative affect on your credit.
In most instances accounts paced in a debt management plan are in arrears, or in default, and you are asking your creditors for concessions such as the freezing of interest and charges, and reducing your monthly payments.
A consolidation loan pays off your other accounts in full, making you have just one monthly payment. There are no concessions, so there is nothing negative to be reported on your credit history.
Is a Consolidation Loan Right For Me?
While a debt consolidation loan can be a good money management tool, you need to look at your complete financial picture to see if consolidating other accounts is right for you.
If you have some credit cards that are “maxed out” to their credit limits, and you wish to consolidate these to save money and reduce your monthly payments, then the consolidation loan is a good option, but have you addressed what brought you to this point of waning and/or needing to consolidate the accounts?
If you consolidate 3 credit cards by paying them off with a consolidation loan, only to continue to use the credit cards carrying balances again, you have not improved your financial situation. You now have the consolidation loan payment each month, plus the credit card payments as you are still using the cards.
The point of a debt consolidation loan is to improve your financial picture.
FAQs about Debt Consolidation Loans
By consolidating the 3 credit cards I have now will it improve my credit rating?
Possibly, yes. By having just 1 open account as opposed to the 3 credit cards, it can reflect better on your credit score. Credit scoring uses outstanding balances and how close you are to your credit limits as one way to determine your credit score.
I am in arrears with some of my accounts, can I still consolidate them?
It is possible to be approved for a debt consolidation loan even with the accounts being in arrears, however there are a few things that need to be considered.
One is why are you in arrears with the accounts?
Does your current credit score meet a lenders criteria to be approved?
Will the consolidation loan improve your finances?
Affordability, are you able to afford to repay the consolidation loan in accord with a lenders guidelines?
Depending on these and other questions, it is possible to get approved for a debt consolidation loan. However, if you cannot be approved for a consolidation loan, or a consolidation loan is not your best option, you can look at debt management plans and other debt solutions.
Do I have to pay a fee to Loanable to apply for a debt consolidation loan?
No! Loanable does not charge any fees to apply for any loans. It costs you nothing to apply with Loanable.
How much can I borrow and what will my payments be each month?
Different lenders have different amounts they will lend, and also for how long they will grant the loan.
The amount you need to borrow will depend on the accounts you wish to consolidate and their current balances.
The amount you need to borrow, and the term of the loan and the interest rate, will determine your monthly payment.
Are consolidation loans secured by property, or unsecured?
A debt consolidation loan can be either secured or unsecured, it depends on the lender and also if you have any property to secure the loan. Many debt consolidation loans are unsecured, which means you do not need property, the loan is a personal unsecured loan.
I have been rejected for a loan in the past, can I get approved?
Loanable does work with lenders that understand some borrowers may have had credit issues in the past or bad credit. The guidelines for granting loans varies among lenders.
If I get a debt consolidation loan, do I pay off the other accounts or does the lender?
It can vary, however, in many cases the lender will pay your loan into your bank account and you then pay off the accounts you wish to consolidate.
If I am approved for a debt consolidation loan and change my mind, can I cancel the loan without any penalty?
Yes, prior to accepting the money in your account, and signing any loan papers, you can cancel the loan at anytime prior to this and there is no fee or charge.
Once your loan is approved, and you have accepted the money, you have a 14 day “cooling-off” period. During this period of time you can cancel the loan, provided you pay back the full loan amount, and you will not be charged any interest or fees.
How soon will my consolidation loan be approved and the money in my bank?
Again, this can vary among lenders. Some lenders offer quick approval and the money in your bank account within 24 hours. It can depend on the lender, and also how quickly you provide them al the details and information they require.
If I pay no fees to Loanable, how do you make money?
At Loanable we never charge a fee to loan applicants for our service. We are paid by the lenders we work with, some may pay us a small fee for referring a loan applicant to them, and some lenders may pay a commission once a loan has been approved.
What if my consolation loan is approved, but not for an amount that will pay off all my credit cards and accounts. What then?
The loan amount you may be approved of can be based on many things, the lender and their lending criteria, your affordability, and the conditions and terms of the loan.
If you are approved for a loan that is less than what you require to pay off all the accounts you wish to consolidate, you have a few options.
You can not accept the loan and continue with your accounts as they are.
You can accept the loan amount and pay off as many accounts as you can, taking into consideration you may still be bettering your financial situation by reducing your monthly outgoings.
Discuss with the lender what other options they may have.
Should I close the credit cards I pay off with my debt consolidation loan?
Closing the accounts you pay off when consolidating debts is your decision to make, however, there are a couple of things to keep in mind.
You would not want to close your oldest, or one of your oldest accounts, as the longer you show you have had credit, and have been in the credit bureaus, it helps your credit score. Part of the credit scoring process is how long you have had credit.
If you feel you may use the credit cards or any open lines of credit after paying them off, which could put you in a worse financial situation, then you may want to consider closing them.
Paying a credit card or line of credit off, only to use it again, is not the path to getting out of debt.
What happens next after I give Loanable my details and information for a loan?
Loanable will then review your details and information on the loan you require and using our advanced technology and knowledge, we will pass your details onto one or more of the partners we work with to help those that are looking for a loan, get the right loan for them.
The lender will then contact you if they require any additional information, such as proof of income, an income and expenditure sheet, or any other information.
Once your loan has been approved, the lender will advise you on how and when you will receive your money.
Is Loanable a bank or lender?
No, at Loanable we are not a direct lender, we are a licensed credit broker, registered and regulated by the FCA/Financial Conduct Authority.
Are my details safe with Loanable?
Yes, your details are kept secure and never sold, they are however passed on only to lenders and brokers we have partnered with so you can get the best loan suitable for your needs. In addition, your details are processed and maintained in accordance with the Data Protection Act 1998.
How many accounts and credit cards can I consolidate into one loan?
That will depend on how many accounts you have you wish to consolidate, their balances, and the loan amount you qualify for.
If for some reason your credit cards and accounts in total are more than the loan you may be approved for, you may wish to pay off and consolidate as many of the accounts as you can.
I had a gambling problem and want to consolidate some gambling debts, is this possible?
You first may want to address your gambling issue and have you dealt with this, and are you seeking help. If you have not, then consolidating the debts you have is not a total solution, and could leave you worse off.
As to using a consolidation loan to pay off gambling debts, much will depend on the lender, their rules, and what types of accounts you have.
Credit cards, and other loans, such as payday loans can be included in a debt consolidation loan. Loans owed directly to gambling houses or gambling establishments may be excluded. Your lender can explain this in more detail once they know your full set of circumstances.
I want to consolidate my credit cards and also a payday loan and credit card that is in my partner's name. Can I get a loan in my name and consolidate mine and my partner's loans?
In theory yes, you can pay off yours and someone else’s loans with your consolidation loan. As long as you qualify and are approved for the amount that will clear the accounts you wish to include, it can be done.
There are a couple of points you may wish to consider prior to doing this.
The new consolidation loan if it is just you that applies, will be only in your name, which means the loan is your responsibility, not your partner’s. You are paying off their accounts, and in essence placing those balances in just your name.
Are there any loans or accounts I might not want to consolidate or pay off with a consolidation loan?
There could possibly be some accounts that is not in your best interest to consolidate, one would be if the interest rate on that account was very low, or much lower than what the interest rate may be on another loan.
However, keeping that in mind, if you are looking to reduce your overall monthly outgoings, and the term or length of a consolidation loan allows you to reduce your payments, it may be worth while to go ahead and consolidate the lower interest account.
You need to weigh all your options.
I just recently consolidated my credit cards, and think I can get a better deal elsewhere, can I consolidate the loan I just took out?
Yes, as long as you qualify for the new loan, and the lender approves you, then yes you can consolidate a recent loan.