What are the benefits of a debt consolidation loan?
Having multiple credit cards or loans can sometimes be challenging to manage. However, options are available to make things simpler and keep you in control of your finances. One of these options is a debt consolidation loan and this can roll your existing borrowing into one simple and affordable loan.
Combining your existing borrowing using a debt consolidation loan can have several benefits:
1. Easier to manage your money
Moving all your borrowing to one lender can give you better control of your finances. One single monthly payment, on the same date each month, can make life simpler than juggling multiple payments to different lenders on different dates. It can also give you a clearer overview of your credit commitments, for example, seeing what you owe and how much you are paying off, how long it will take you to pay off - all in one place.
2. Save you money
A debt consolidation loan should save you money each month, allowing you to pay off higher interest credit, like store cards, credit cards and overdrafts, with one lower rate of interest.
It is important to work out the total cost of your existing borrowing and the total cost of consolidating your debts to see whether it will save you money. You should also consider whether there are any fees involved in paying off your existing loans and cards.
3. Repay your debt sooner
By paying a lower rate of interest through a debt consolidation loan, more of your money goes towards paying off the amount you borrowed, rather than paying interest. So, if you decide to continue paying the same monthly amount as your existing total monthly payments, you will pay off your debt quicker. Repaying your debt faster means you may pay less interest overall, saving you money.
Like a regular personal loan, a debt consolidation loan is for a fixed period - unlike credit cards, store cards and overdrafts. Having structured, fixed repayments can help as they give you a clear and defined end date. Whereas, for example, just making minimum payments on a credit card will take you longer to pay off what owe because you only pay back a small percentage of your balance each month.
4. Reduce your monthly payment
A lower rate of interest on a debt consolidation loan could reduce your monthly repayments. You may be able to reduce your monthly payment further by spreading your repayments over a longer period. This can help make your monthly repayments more manageable. It is important to note that by extending your loan term, your monthly payment may be reduced, but you could end up paying more in interest in the long run.
5. Improve your credit score
When you initially apply for a new debt consolidation loan you may see a temporary drop in your credit score because it may appear you are taking on additional credit. As you start to pay back your loan your credit score should improve over time – this is because you are making a regular and structured repayment each month.
One of the things that impacts your credit score is called ‘credit utilisation’. Credit utilisation is calculated based on how much revolving credit you use – this is borrowing where the amount borrowed, the repayments and duration are not fixed, such as a credit card or overdraft. High credit utilisation – this is high use of overdrafts and credit cards – can lower your credit score. Reducing your credit utilisation, by using a debt consolidation loan to pay off overdrafts and credit cards, could help improve your credit rating.
Consolidating your debt into a single monthly payment also simplifies your borrowing, this also means you might be less likely to miss repayments. Like all other forms of borrowing, missing repayments on a debt consolidation loan could impact your credit score.
What should I consider before taking out a debt consolidation loan?
Before borrowing any money, it’s important to make sure you choose the right product for your needs.
Can I afford the new repayments? – ask yourself whether you can afford to make the repayments now and in the future?
Could I save money? – is the cost of a debt consolidation loan lower than your existing borrowing?
What fees will I be charged for repaying my existing borrowing? – does the amount you save by consolidating your debt offset any fees you will be charged by your existing lender(s) when you pay off the debt early?
What other options are there?
If you have savings, you might prefer to repay your debts using this, starting with the most expensive debts first.
Another way to consolidate your credit card debt is using a balance transfer to another credit card. This is usually more suitable if you have more moderate levels of borrowing.
If you’ve made the decision to take out a debt consolidation loan then RateSetter may be able to help:
New to RateSetter? A RateSetter personal loan can be used to streamline your existing borrowing into one affordable monthly payment. It could also save you money every month in interest. Find out more.
Already have a RateSetter loan? You may be eligible to consolidate your existing borrowing with your current RateSetter loan or take out a new loan. Sign in to your account to get a personalised rate more.
If you’re worried about debt, you might find it useful to visit The Money Advice Service, which has further information about debt management and offers free debt advice.