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How Do Debt Consolidation Loans Work?
A debt consolidation loan is a loan you can take out to repay all your other debts, including outstanding credit card or store card balances, bank overdrafts and other personal loans.
A debt consolidation loan allows you to put all your outstanding debts into one loan, making your outstanding debts much more manageable.
When you take out a debt consolidation loan you'll use the money to repay all your existing debts, so these debts will no longer exist, and you will just owe the amount of money to one lender.
How can a debt consolidation loan help me?
Consolidating your debts into one loan can often mean your monthly repayment will become much less than what you are currently repaying each month on all your separate debts.
As well as easing the burden of hefty repayment bills, a debt consolidation loan can remove a lot of stress of trying to juggle repayments on many different credit or loan debts.
What types of debt consolidation loans are available?
There are two main types of debt consolidation loans, however, the choice open to you will depend upon your current financial circumstances.
A secured loan is a loan that uses your property as security on the loan, allowing you to borrow larger sums of money over a longer repayment period.
Secured loans are often available to people who have a bad credit score due to a poor credit history.
An unsecured loan is the second option available for debt consolidation purposes. Unsecured loans do not require a property to take out the loan and they can offer lower rates of interest.
However, unsecured loans are only available to people who have a good credit history.
It is also important to bear in mind that you cannot borrow as much money with an unsecured loan that you could potentially borrow with a secured loan. Also, because the repayment terms are often much shorter, monthly repayments can be more expensive.
How much can I borrow with a debt consolidation loan?
As with any loan, you'll want to know how much you can borrow so you can find out if the particular loan will be able to consolidate all of your outstanding debts or only an amount of them.
Secured debt consolidation loans
A secured loan for debt consolidation purposes will allow you to borrow money based upon the equity available in your property.
Finding out how much equity you have in your house is a reasonably simple calculation. You’ll need to know the current market value of your property and then minus any outstanding mortgage.
Because you'll be taking out the secured loan for debt consolidation purposes, most loan lenders will not take into consideration any other secured loan you have on the property - as long as you will be repaying this loan with your new debt consolidation loan.
Secured loans are usually available between £5,000 all the way up to as much as £100,000 or even £250,000 - depending upon the equity in your property.
If you have little or no equity in your property, there are secured loans that can lend up to 125% of your property's value.
Unsecured debt consolidation loans
Because unsecured loans do not offer any loan security for the loan lender they are leant solely upon your personal financial circumstances and credit score.
Unsecured loans are available between £1,000 and £25,000. However because repayment terms are much shorter, with the longest available being 10 years, monthly repayments on larger loan amounts will be very high.
Although unsecured loans are available to people who do not own their own home, you will need to have a good credit history.
What are the different loan repayment and interest options?
Secured loans
Secured loans for debt consolidation purpose are available with loan terms from 3 years to 25 years.
Secured loans usually have variable interest rates, which means that they will fluctuate inline with the Bank of England's base rate, and monthly loan repayments can go up as well as down.
The longer repayment terms available with secured loans can mean that loan repayments are much affordable as the loan amount is spread over a much longer period.
Unsecured loans
Unsecured loans can usually be taken out over a period of 1 to 7 years, although Northern Rock and Eskimo unsecured loans can be taken out over 10 years.
Unsecured loans offer either fixed or variable interest rates, depending upon the loan lender. A fixed interest rate can be an attractive option as the interest rate and your loan repayments will remain the same throughout the entire duration of the loan even if the base rate goes up.
Because unsecured loans have shorter repayment periods, they are more suitable for smaller loan amounts, as the monthly repayments on larger loans can be expensive.
Comparing debt consolidation loans
When you have a good idea of the type of debt consolidation loan you would like to take out, check out our debt consolidation loan comparison page, where you can find all the loan lenders available for debt consolidation purposes.
Compare debt consolidation loans
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