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
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.
Does consolidating loans hurt credit score? ›
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.
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.
What are the drawbacks of a debt consolidation loan? ›
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.
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.
Is it better to consolidate or settle debt? ›
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%.
How much debt is too much to consolidate? ›
Debt-to-income ratio
A high DTI can preclude you from qualifying for new debt accounts. Check Out: What Is Credit Card Consolidation? Good to know: A good DTI is generally considered to be anything below 36%, but you can qualify for certain loans with one that's higher.
What score do you need to consolidate debt? ›
You need a minimum credit score between 580 and 680 to get a debt consolidation loan that offers reasonable rates with most lenders. The higher your credit score is, the lower your APR is likely to be - and the main purpose of a debt consolidation loan is to get a lower APR for your debt.
If you have loans that have been in repayment for more than 20 or 25 years, those loans may immediately qualify for forgiveness. Borrowers who have reached 20 or 25 years (240 or 300 months) worth of eligible payments for IDR forgiveness will see their loans forgiven as they reach these milestones.
Who is the most reputable debt consolidation company? ›
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.
Four types of debt are commonly consolidated: credit card debt, student loan debt, medical debt and high-interest personal loan debt. You may reduce the overall cost of repayment by securing better terms and interest. You'll also have a single payment to keep track of instead of several.
Can debt consolidation hurt your credit? ›
If you do it right, debt consolidation might slightly decrease your score temporarily. The drop will come from a hard inquiry that appears on your credit reports every time you apply for credit. But, according to Experian, the decrease is normally less than 5 points and your score should rebound within a few months.
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 to put all debt into one payment? ›
For most people, a debt consolidation loan involves taking out a single loan that pays off your existing debts. This could work out cheaper if you're offered a lower rate of interest overall, when comparing it to your other debts' interest rates.
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.
Is it hard to get approved for debt consolidation? ›
Although lenders differ, most require that borrowers have a good credit score, a low debt-to-income ratio and a steady income. Some lenders cater to borrowers with lower credit or allow for co-signers, which can increase your approval odds and or grant you a better interest rate.
Will debt relief ruin my credit? ›
Debt relief through a debt management plan
Your credit card accounts will be closed and, in most cases, you'll have to live without credit cards until you complete the plan. (Many people do not complete them.) Debt management plans themselves do not affect your credit scores, but closing accounts can hurt your scores.
