What is Debt Consolidation?

The Lending Channel
Date Published:30/08/2021

Debt Consolidation Scotland

With so many loan products on the market, it makes sense that some people get tangled up in multiple debts. Credit cards, mortgages, overdrafts and other personal loans can quickly escalate and become overwhelming. Debt consolidation can sometimes help to ease the pressure and worry of managing multiple loans at once.

What is debt consolidation?

Debt consolidation is the process of combining several debts into a single loan, which helps to streamline repayments, reduce stress and makes handling your debt easier. 

You might have many loans in different forms, including:

  • Credit Cards
  • Overdrafts
  • Personal loans
  • Store cards

Managing different loans from different financial institutions can quickly become impossible and confusing. Each debt will have different rules regarding repayment frequency and interest rates, and staying on top of your monthly outgoings is crucial if you don’t want to incur penalties.

Through this formal debt solution, you simplify the process. You’ll have a much clearer idea of the terms of your loan as they will be distinctly laid out for you. There will only be a single interest rate you need to be aware of. And you’ll make a single regular monthly repayment rather than several different ones to the multiple different lenders. 

Debt in coins

How do debt consolidation schemes work?

A debt consolidation loan merges all your loans into just one loan, allowing you to make a single monthly payment as opposed to multiple payments each month. The idea is to help you keep up with repayments, consolidate debt and save money and time in the long run.

We can break the process down into 3 simple steps;

  • 1st Step - Work out what you owe and calculate the total value of the new loan that you'll need to cover all your previous existing debts
  • 2nd Step - Use this loan to pay off all of your existing debts & borrowing. Then you will be left with just one loan that you will continue to pay off in monthly payments.
  • 3rd Step - Pay back the new loan! After having paid off all of your existing debts you will be put on a repayment plan to pay back the consolidation loan. Note that you will be given a set time frame to pay back this new loan amount. 

What can I use a debt consolidation loan for?

A debt consolidation loan allows you to pay off multiple different types of debt in one recurring monthly payment. The types of loans you can pay off together include; 

  • Credit Card Debt - a common way people incur debt is the high APRs charged by their credit card issuer. Credit cards can turn into a very expensive way to borrow over the long-term
  • Overdraft Payments - many banks have high interest rates on overdraft payments which, over time, can lead to a large level of debt
  • Store Cards - these can often include high APRs and extra fees which over time can build up
  • A Personal Loan - including (but not limited to) loans used for buying a car, making home improvements or even purchasing a holiday package

debt consolidation. Consolidate your credit card debt

Should I consolidate my debt?

Although a debt consolidation loan undoubtedly makes things easier and less stressful, you must pay attention to the overall amount you’ll end up paying. A lot of consolidation loans advertise lower interest rates, but you may end up paying more interest in the long run if the agreed terms of the contract are for a longer period. 

It’s crucial to weigh up the difference between your “total amounts payable”. Add up all of your existing debt as it currently stands, and then compare it to what you would end up paying should you choose a consolidation loan. Please also be aware that you could be charged an early repayment fee for any existing loans, which can have a big impact on the total amount you’ll pay.

Debt consolidation can be dangerous, so it’s absolutely vital you seek the advice of an professional debt adviser before making any big decisions. The Lending Channel has extensive experience dealing with complex cases, bad credit and multiple debts, so you can trust us to give you reliable debt advice. If you decide to go in a different direction, we can help you negotiate with your lenders through a debt management plan. Whatever your circumstances, we are here to help.

What are the risks of debt arrangement scheme?

Like most loans, debt consolidation loans come with substantial risks. We've weighed up the pros and cons for you to evaluate;

Advantages of debt consolidation:

  • Often slashed interest rates
  • Easier and more manageable repayment structure
  • Potentially lower and more affordable payments monthly
  • Good for your credit score

Disadvantages of debt consolidation:

  • Significant consequences for missed repayments - you could lose your home or other assets if you fail to make payments on a secured loan
  • Often expensive to set up - many lenders charge fees
  • Other options are available, such as a 0% credit card - if your debt is mild to moderate, this might be a better choice

What is an unsecured debt consolidation loan?

An unsecured debt consolidation loan is when you consolidate your debt into one loan without securing it against any asset, such as your house or your car. Although this sounds appealing, it can often be hard to get unless you have a good credit rating. 

In many cases you will have to take out a secured debt consolidation loan, which of course is when the loan is secured against a valuable asset (house, car). If you have poor credit history or a low credit score, this may be the only option for you when it comes to taking out a debt consolidation loan. 

What is the application process?

You’ll apply for a loan through a lender as usual. The lender will use your credit score to determine if they’re willing to loan to you. They will dictate what kind of loan and what APR they can offer you.

If you have bad credit, you’ll still be able to apply for loan consolidation, although you won’t be able to get certain cheaper deals. 

Some lenders might offer you debts against your home or car, but be careful - if you fail to make loan repayments, they could repossess your asset.

The best way to look for a suitable loan is by seeking help from professionals. The Lending Channel is well versed in finding the best deals, even in the trickiest situations. Call us today and let us do the hard work for you.

Debt consolidation and remortgaging

It is possible to take out a special remortgage deal called a debt consolidation mortgage . This is where you’ll take out the single loan using the available equity in your property. This involves releasing some of the money that you have already paid off for your home, helping to ease the pressure on your finances.

This mortgage deal might offer you lower monthly payments than your existing mortgage, which frees up money that can go towards paying off outstanding debts. However, if you fail to meet payments, there can be huge consequences, and you could lose your home.

Am I eligible for a debt consolidation mortgage?

Your eligibility will depend on a few factors:

  • The percentage of your house you own outright
  • Your income
  • How much you want to borrow from your mortgage lender

What are the alternatives?

If you’re happy with your current mortgage deal, it might be better to consider alternatives such as a second charge loan . As the name suggests, this involved you taking out a second mortgage on top of your existing one. This allows you to borrow money without having to remortgage your property. Your debts will be secured against your home.

debt consolidation application process

Let us take over from here

If you’re feeling overwhelmed by the many options and nuances involved in making these financial decisions, it makes sense. With so many products on the market, especially under stress, it’s very important to consult a professional money adviser for mortgage advice before making any decisions.

Give us a call today.

The Lending Channel is dedicated to helping our clients find the right deal for them that suits their unique circumstances. We will be pleased to help you.

Category Tags Mortgage Guides, Second Charge Mortgages
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