Debt Consolidation Loans

Having many loans and debts running in parallel cannot only be overwhelming but also financially destructive. If you are in such a situation a good solution is to gather the different debts into a single one that has an affordable monthly payment. This is also called a debt consolidation loan.

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Understanding the Debt consolidation loan

Practically this is a loan that you obtain from a creditor that allows you to pay off multiple debts. Then you only have one single payment to make each month that is affordable for you and suitable for your current financial situation. This, of course, will not write off any debts you own, it will, however, make them much more manageable and less overwhelming for you.

The most important thing to keep in mind is that you obtain a Debt consolidation loan that is (a) affordable, and (b) big enough to pay any other smaller debts.

Types of Debt consolidation loans

The first type of a Debt consolidation loan is a Secured one.  This means that the loan you will obtain from the creditor is secured against an asset such as your home (ie a homeowner loan). So if you default, your home is at risk.

The second type of Debt consolidation loan is an Unsecured one.  You do not have to provide any assets for security. However, in this case, the amount you can obtain from the creditor can be smaller. Usually up to £25,000.

If you are looking for a consolidation loan you should keep in mind though that the interest rate you will be paying might be higher than the interest rates linked to the original smaller amounts you were owing in different debts. Also, it’s important to be aware that if you have a history of defaulting on repayments you will face high-interest charges on any consolidation loan.

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When is a Debt consolidation loan a good solution?

If you have a steady income and a good credit history and you can afford the proposed monthly payments then this might be a good solution for you. However, if you are struggling with many unsecured debts it may be hard to prove that you have a good rating.

Which individuals are eligible for a debt consolidation loan?

Here are some of the criteria you must meet in order to qualify for a Debt consolidation loan:

  • You must have a steady job and income to prove and make sure that you can pay the installments.

  • Have overall financial stability so that you can afford to pay your debt instalment even in the event of unexpected circumstances such as health deterioration or a change in the economy.

  • Your credit rating must be positive

  • This is your first consolidated a debt

It might be possible to secure a Debt consolidation loan even if your credit rating is poor. This can be the case if you are the owner of your home. Make sure though to not put your home at risk of repossession in the event that you might not be able to make the payments.

Can you receive a Debt Consolidation Loan?

In any case, Debt consolidation loans are given to individuals by analyzing each case separately based on the documentation provided to the creditors and the specific lending criteria each creditor has.

If you are struggling with your debts it is absolutely crucial to get some professional advice from a debt expert before you move forward with a Debt consolidation loan. This will help you make the best decision for you and your family.

Debt consolidation loans have both advantages and disadvantages which you should consider together with your debt advisor.

Advantages of a debt consolidation loan

  • Manageable payments of all your debts in a single instalment paid monthly and which is affordable to you
  • Consolidation loans are not recorded on a public insolvency register as they are an informal solution
  • It gives you a longer time frame to repay your debts.
  • The total amount you will repay each month will now be lower and within your current financial capabilities.
  • A positive impact on your credit rating and your credit history but only if you manage to make all the monthly payments on time as agreed

Disadvantages of a debt consolidation loan

  • There is no writing off of your debt or forgiveness which means you have to repay everything in full including interest
  • Debt consolidation loans are hard to obtain in the case that you have a poor credit history.
  • The interest rates might change over time.
  • The total amount you will repay will be larger as the total loan is repaid for a longer period of time adding up more interest.
  • Your property will be at risk if you fail to make any payments and legal action can be taken against you.

What process should you follow to get a Debt consolidation loan?

There are some common steps and actions to obtain a Debt consolidation loan and eventually become debt-free. However, keep in mind that each case is different and will be evaluated by the advisor and the loan provider separately.

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  • 1
    To begin with, it is important that you search and negotiate for the best deal.

    There are many companies offering consolidation loans. You can compare their terms and conditions, interest rates and decide what is best for you.

  • 2
    The second step is the application process

    After having compared all the available options you might want to decide which is the best provider for your Debt consolidation loan and proceed with the application process. Proof of your financial situation (such as income, salary, real estate owned) will be needed to show the creditor your ability to pay off your debt. Your credit history and score will also be taken into consideration.

  • 3
    Next step is to repay the smaller debts with the new debt consolidation loan

    If your application is approved and you receive the loan, the next step is to distribute it between your existing creditors. Here you might even opt for a debt settlement offer since you are paying off the debt all at once.

  • 4
    The final step is to begin paying your installments for your Debt consolidation loan

    Make sure you are making your monthly payments on time not only to manage to clear your debt but also to obtain a positive credit score.

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"Become Debt Free" is a trading name of Re10 (Finance) Ltd (company number 4651137) with offices based in Leeds and London. We specialise in providing and administering Individual Voluntary Arrangement (“IVA”) solutions to individuals based in England, Wales and Northern Ireland. We do not administer Debt Management Plans, Debt Relief Orders, or any other debt solutions.  We only provide advice after completing or receiving an initial fact find where the individual(s) concerned meets the criteria for an IVA, therefore, all advice is given in reasonable contemplation of an insolvency appointment. Re10 is regulated by the Insolvency Practitioners Association.

To qualify for debt write off in an IVA with us, you must have a minimum of £7,000 of qualifying unsecured debt owed to two or more creditors. A debt write off amount of between 25% and 75% is realistic, however the debt write off amount for each customer differs depending upon their individual financial circumstances and is subject to the approval of their creditors.

Andrew Bowers FIPA FABRP is authorised by the Insolvency Practitioners
Association to act as a Licensed Insolvency Practitioner.

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