Jasmine Birtles
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Are consolidation loans worth it?
Lucy Miller
17th May 2020
Struggling with debt can cause a huge amount of stress. This is especially the case if you’ve got debts owed to a few different places. How do you know which debt to pay off first, and how to keep the interest down so you don’t end up paying far more than you need to? This is where consolidation loans can come in.
Consolidation loans are loans that put all your debt together, allowing you to pay it off with one consolidated amount monthly. An amount paid off every month can relieve the worries that you might have over your debts, and can make the overall amount seem much more manageable.
Here, we’ll discuss the pros and cons of consolidation loans and explain how you can go about finding one that works for you.
- Pros of consolidation loans
- Cons of consolidation loans
- I’m not sure about a consolidation loan – are there other options?
- How to find a consolidation loan
- Other money management tips
Pros of consolidation loans
You’ll reduce your interest
It’s likely that, with a consolidation loan, the interest will be less than you’d pay collectively on your various debts, even though these amounts would be smaller. Reducing your interest payments might seem like it’s only saving you very small amounts, but it’ll mean you’re paying less of it in the long term. And that, of course, can only be a good thing.
You (usually) don’t have to risk your assets
Unsecured loans mean you don’t have to put up your assets as collateral in the case that you can’t pay off your loan. In most cases consolidation loans will be unsecured, meaning greater security for you.
Note that this might not be the case if you have a particularly bad credit score. In this case, you might need to take out a secured consolidation loan instead.
You’ll have a set time to pay it off
Most consolidation loans last between one and five years, meaning you’ve got a few years to pay off the sum of your debt. Of course, you might not need the full five years. These loans are flexible, so you can sign up to a plan that allows you to pay off what you owe without putting your finances under too much strain.
You’ll find it easier to manage
This one is basically a given. It goes without saying that keeping track of the repayments needed for one single loan is going to be significantly easier than managing multiple ones, making your life a whole lot easier. It’s much better to only have to deal with one single creditor than multiple ones at the same time, too.
Cons of consolidation loans
Your credit score
If you’re late making a payment on your consolidation loan, or you continue to use your credit card whilst or after paying off your balance, you might find that your credit score is negatively affected. Be aware of this, and make sure you’re not borrowing other money whilst you have the loan and that you’re able to make your payments on it promptly.
Your debt isn’t “written off” or reduced
Yes, it might seem like your debt is lessened because the amount you pay off monthly is suddenly manageable. But this is a scheme that allows you to manage your debt, not reduce it. As consolidation loans might last five years, you might end up paying it off for longer than you would your individual debts before they were consolidated. The key thing to remember, though, is that this debt will now be a manageable one. In addition, you’re paying interest on just one loan rather than several, so you could pay less overall.
It won’t address why you got into debt in the first place
Whilst a consolidation loan can help you get your finances back on track in the short term, you shouldn’t think of it as the ultimate solution to your monetary issues. The harsh truth is that there is a reason you got into debt in the first place, and once you’ve set up your repayment plan you need to address the longer term problem too. This might mean a change in behaviour or lifestyle, and might cause you to have some difficult conversations with family members. It’s imperative that you do address the underlying issue as well as making practical changes, though – however difficult this might be. If you don’t, you might end up back at square one a few years down the line.
I’m not sure about a consolidation loan – are there other options?
Consolidation loans won’t be the right choice for everyone. If you only have a small amount of debt, for example, a 0% balance transfer onto a credit card might be a more sensible idea. Talk to your bank about what the right option will be for you.
If you’re not able to make any repayments at all, don’t take out another loan. Instead, start a debt management plan immediately.
First, talk to your providers and ask for payment and interest rate freezes. This will give you breathing space while you arrange a repayment plan.
Next, speak to a debt management charity such as National Debtline or Stepchange. Their services are completely free and confidential. They’ll help you find out the best debt recovery plan for your circumstances, and liaise with creditors to take that stress away from you.
How to find a consolidation loan
The very good news is that the most trusted names on the high street are in the market for providing consolidation loans. The Post Office is one option, and other household names that offer these kinds of loans include HSBC, Barclays, Halifax and TSB. Make sure you do your research to find the best deal for you!
Other money management tips
A consolidation loan might be helpful, but if you’re in debt you should think about what other things you could do to better manage your money.Check out a few of our other articles for tips on everything from mortgage holidays to making a quick buck from selling your stuff…
- Ask for a payment holiday on your mortgage, insurance or credit cards
- Pay off your highest-interest loans and credit cards first
- Make a budget – and stick to it!
- Sell unwanted stuff for quick cash
- Find a second job or side hustle to bring in extra cash
We hope this article is useful, and can help you think about any debts you have in a constructive way. If you’ve got questions about debt and consolidation loans, hop over to our MoneyMagpie Messageboard to ask experts and other Magpies for help. You could win an Amazon voucher for Post of the Week, too!
All loan comes with a price, so be very sure what you are accepting before signing up.
Very well explained.
Nice