Debt consolidation is often misunderstood as it has a lot of moving parts. This financial product is designed to help you collate all the debts and merge them into one. We don’t intentionally accumulate debts and it is a long-term process. Missing one repayment and then one more repayment – starts a series of missed repayments. This leads to debt accumulation, which becomes difficult to manage at a later stage. A debt consolidation loan can help your streamline your debt repayment if you have a concrete strategy to pay off on time.
In this blog, we will answer the top 5 FAQs about debt consolidation loan so that you know what benefits you can gain from it.
1. How does a debt consolidation loan work?
A debt consolidation loan allows you to roll multiple debts into a single loan. That means if you have a pile of debts that you can no longer manage, you can consolidate them into one. Instead of repaying multiple loans, repay a single one. It doesn’t mean that you will no longer repay the existing debts. Simply put, the new loan that you take out is meant to repay all other debts that you have.
It is an attractive way to manage your debt issue. Different loans will have different interest rates. If you get a debt consolidation loan at a lower interest rate than the overall interest that you are paying – you are likely to save some money.
2. Who can apply for a debt consolidation loan?
Every lender has different lending criteria. Before you apply with any lender, visit their website, and go through their eligibility criteria to know where you stand. If you apply with a lender and later got rejected because you couldn’t qualify the basic criteria they have, then it will certainly impact your credit score.
However, there are a few basic criteria that almost all the lenders in the UK have and they are:
- You must be 18 years of age or above.
- Your age should not be more than 75.
- A legal citizen of the United Kingdom.
- Have a valid and functioning bank account.
Apart from these, lenders also conduct a credit check to evaluate your creditworthiness and affordability. With a good credit score, you are likely to get offers, which have lower interest rates. However, with a bad credit score, the interest rate that you will be offered may be high.
3. What if you cannot afford the repayments of a debt consolidation loan?
If you fail to manage your repayments even after taking a debt consolidation loan, then it will adversely impact your credit score. With an unsecured debt consolidation loan, there is no risk to your property if you do not make the repayments. But after you miss a series of repayments, the lender may take legal help to recover the money you owe to them. With a secured debt consolidation loan, your asset or home will be at stake as the lender may repossess it to recover the money.
Before you decide to borrow a loan to repay your existing debts, draft a repayment plan so that you stay on the right track. If you repay this loan on time and in full, your credit score will get a boost.
4. Is a debt consolidation loan guaranteed to work?
Whether a loan works for you depends on you completely. It has a lot to do with how you manage the repayments. So, there is no guarantee that a debt consolidation loan will work for you unless you take proactive steps to get debt-free. This financial tool can only help you ease the financial burden.
If you keep spending from your credit card and keep on making new loans while cleansing the existing debts – a debt consolidation loan can backfire. Using your credit card after it is freed up is quite tempting, but your attempt to get debt-free will be futile if you do not become a responsible spender.
5. What is the difference between debt consolidation and debt settlement?
Debt settlement is a service that allows you to pay less than what you owe originally. As the name suggests, it is a settlement that can be arranged to reduce your total repayment amount. You may be needed to pay off the debt in a lump sum. It may damage your credit score, therefore, it is important to research the debt settlement program that you consider. Also, do your homework so that you are not stuck with debt relief scams.
While a debt consolidation loan helps you pay off the entire amount that you owe to a lender or a credit card company. Moreover, you can repay the debt in multiple monthly instalments. It’s an added advantage as your budget will not be disturbed if you know how much you have to pay each month towards your debt.
How to apply for a debt consolidation loan?
Compare multiple loan offers in the market to find the best debt consolidation loan as per your financial circumstances. Review your credit report to fix any errors on it. As the interest rate that you will be offered by the lenders depend on your credit score as well. A credit score is not the only factor on which your application will be assessed, there is a wide range of factors such as your monthly income, outgoings, employment status, and debt-to-income ratio.
Once you are done with the comparison and you have finalized a lender, check their terms & conditions. Know what you are about to get into before signing the agreement. It is important to read the fine print as well.
Talk to the lender if you find any issues in the agreement and settle it amicably. Also, have a repayment strategy pre-built so that you do not face any setbacks while repaying the loan.