A debt consolidation loan can see you repay existing debts with one loan, leaving you with one lender to deal with and one payment leaving your account every month – which should be lower than before.
There are two ways to lower your monthly payments with a debt consolidation loan – one is to find a debt consolidation loan with a lower APR (Annual Percentage Rate) than the credit cards / store cards / overdrafts or other debts you are planning to pay off.
Another way to lower your monthly payments is by spreading your loan repayments over a longer period. If you borrowed £5,000 at an APR of 9.5% over three years, you would pay £160 per month. Spread that same loan with the same APR over five years and you’ll pay £105 per month. 1
Some people even secure their debts against their home by borrowing a bit more on their mortgage to pay them off. Just bear in mind your mortgage payments will increase if you do that and naturally, your home is at risk if you begin missing payments.
An advantage is that you’ll free up money in your monthly budget, which you could put into savings for the future, for example. A drawback is you’ll be paying interest for longer and may pay more interest overall as a result.
However, you should only really consider a debt consolidation loan if your income is reliable and you know you can afford regular repayments. If you have any more questions about debt consolidation, click here.
If you have been considering consolidating your debts because you’re struggling with your existing debts, a debt consolidation loan won’t be suitable. However, there are other debt solutions that could help you to make your debts more manageable.