Consolidating debt is when you take out a single, new loan to pay off several existing debts. This can be a good way of taking control of your finances but you need to be careful. A consolidation loan may not always be your best option.
Before getting a consolidation loan
Before you decide on a consolidation loan, find out what's on offer and what alternatives you've got. These could include:
- trying to make new arrangements with your existing lenders
- checking that you're making the best use of credit options you've already got, such as an overdraft facility, credit or store cards, a personal loan or extension to your mortgage
- borrowing money from relatives
Agencies offering free help and advice include:
If you do decide to take out a consolidation loan, shop around for the best terms from a reputable lender. Building societies and banks may be able to offer you a personal loan.
Getting advice about loans
You should always get independent advice before taking out a loan.
There are many organisations offering free and independent advice to help you find the best way to deal with your debt problem, like Advice NI.Some financial advisers will charge you a fee for their services.
Advantages of a consolidation loan
Used carefully, a consolidation loan can help to put you back in control of your finances.
The advantages can include:
- paying a lower rate of interest – longer-term consolidation loans may be better value than short-term borrowing
- your monthly payments might be lower
- knowing when you'll finish paying off the debt
- you only have to make a single payment each month
- you only deal with one lender
- it may stop you falling behind on payments and getting a bad credit rating
Disadvantages of consolidation loans
Possible disadvantages to a consolidation loan include:
- if the loan is secured against your home, your property will be at risk of repossession if you can't keep up your payments
- you could end up paying more overall and over a longer period
- you usually pay extra charges for setting up and repaying the new loan
- all your eggs will be in one basket - if you get into difficulties, it may be more difficult to come to a new arrangement with a single lender
- if you have a poor credit rating, you may only be able to get a loan at a high interest rate or secured against your home
- if you don’t pay off all your existing debts, you may struggle to make the payments on top of the new loan
How to choose a consolidation loan
Always shop around for the best terms as it will save you money. Make sure you understand all the terms and conditions of the loan and that you can afford to keep up the payments on your consolidation loan.
You should check:
- how long you'll be making repayments and how much you'll pay back in total
- the interest rate and whether it can change
- what the monthly repayments are and what happens if you miss one, for example, you might be charged a penalty
- any penalties or costs you'll have to pay if you want to repay it early
- what happens if it's secured on your home and you can't keep up the repayments
Once you've arranged the loan, aim to keep your finances under tight control, for example, cut up your credit cards and don't let the debt build up again. Be aware that the lender may put pressure on you to borrow more by extending the loan.
You'll be encouraged to take out insurance with your loan. Make sure you're clear about the terms, that you really need the insurance and that you'll be able to claim on it if you need to.
FAQs
Bottom line. If you do it right, debt consolidation will only cause a minor hit to your credit, after which your scores should quickly rebound.
Does consolidating loans hurt credit score? ›
Bottom line. If you do it right, debt consolidation will only cause a minor hit to your credit, after which your scores should quickly rebound.
Is it a good idea to consolidate all debt? ›
Debt consolidation is a good idea if your monthly debt payments (including mortgage or rent) don't exceed 50% of your monthly gross income, and if you have enough cash flow to cover debt payments. Debt consolidation isn't a quick fix for severe debt problems.
Is debt consolidation a good way to get out of debt? ›
Taking out a debt consolidation loan can help put you on a faster track to total payoff and may help you save money in interest by paying down the balance faster. This is especially true if you have significant credit card debt you carry from month to month.
What happens when you consolidate debt? ›
Debt consolidation loan
Banks, credit unions, and installment loan lenders may offer debt consolidation loans. These loans convert many of your debts into one loan payment, simplifying how many payments you have to make. These offers also might be for lower interest rates than what you're currently paying.
Can I still use my credit card after debt consolidation? ›
If a credit card account remains open after you've paid it off through debt consolidation, you can still use it. However, running up another balance could make it difficult to pay off your debt consolidation account.
Who has the best debt relief program? ›
Best debt relief companies
- Best for debt support: Accredited Debt Relief.
- Best for customer satisfaction: Americor.
- Best for large debts: National Debt Relief.
- Best for credit card debt: Freedom Debt Relief.
- Best for affordability: New Era Debt Solutions.
- Best longstanding company: Pacific Debt Relief.
For most people, debt consolidation is the better choice. When comparing the two options, here's what to consider: With debt consolidation, you'll pay less in fees. Balance transfer cards typically charge a balance transfer fee of 3% to 5%.
What is a disadvantage of debt consolidation? ›
The potential drawbacks of debt consolidation include the temptation to rack up new debt on credit cards that now have a $0 balance and the possibility of hurting your credit score with late payments. Also note that the best personal loans go to consumers with very good or excellent credit, so not everyone can qualify.
How much debt is too much to consolidate? ›
It generally takes a DTI of 36% or less to get the best interest rates and other terms. Many lenders won't loan to borrowers whose DTIs are over 43% at all. Even if approved, a high-DTI borrower may have to pay more interest on a debt consolidation loan than for the loans being consolidated.
Every lender sets its own guidelines when it comes to minimum credit score requirements for debt consolidation loans. However, it's likely lenders will require a minimum score between 580 and 680.
Is it expensive to consolidate debt? ›
Debt consolidation loans can include origination fees, which are typically 1% to 10% of the total loan amount and are typically included in the loan's annual percentage rate. Balance transfer cards often come with balance transfer fees, usually 3% to 5% of the amount you're transferring to the new card.
What is the best debt consolidation company? ›
Summary: Best Debt Consolidation Companies of 2024
| Company | Forbes Advisor Rating | Loan Amounts |
|---|
| SoFi® | 5.0 | $5,000 to $100,000 |
| Upgrade | 4.9 | $1,000 to $50,000 |
| Happy Money | 4.4 | $5,000 to $40,000 |
| LendingClub | 4.4 | $1,000 to $40,000 |
3 more rowsJun 4, 2024
Debt consolidation can negatively impact your credit score. Any debt consolidation method you use will have the creditor or lender pulling your credit score, leading to a hard inquiry on your credit report. This inquiry will decrease your credit score by a few points. However, this credit score decline is temporary.
Will my loans be forgiven if I consolidate? ›
If you consolidate loans other than Direct Loans, consolidation may give you access to forgiveness options, such as income-driven repayment or Public Service Loan Forgiveness (PSLF). If you consolidate, you'll be able to switch any variable-rate loans you have to a fixed interest rate.
How hard is it to get a debt consolidation loan? ›
The minimum credit score needed to secure a debt consolidation loan ranges from 580 to the mid-600s, depending on the lender. The best terms and rates go to borrowers with scores that are around 700 or higher.
What is the downside to consolidating student loans? ›
Consolidation has potential downsides, too: Because consolidation can lengthen your repayment period, you'll likely pay more in interest over the long run.
Does a debt consolidation loan affect getting a mortgage? ›
Generally speaking, having a debt consolidation loan will not have a negative impact on your ability to refinance your home or obtain a new mortgage. In fact, it may actually improve your ability to qualify. One thing that a lender will assess during the mortgage or refinancing review is your debt-to-income ratio.
Does debt consolidation affect buying a car? ›
No, debt consolidation doesn't affect buying a car.
Still, in scenarios where the company wants to purchase the car by securing a loan, it may be affected by the debt arrears, which are part of the considerations creditors consider before giving out loans.
