Many people have over the years built up unsecured debt, which for some is becoming harder to manage and putting them under financial pressure. Here we look at how a debt consolidation loan could help, but you must also consider the downside plus alternative debt solutions to help you make the right choice.
What is a debt consolidation loan?
This is a loan which is taken out to consolidate and pay off other debts. May be you have a Credit card with £8,000 balance, a loan with a £10,000 balance and a mail order card with a balance of £5,000. You therefore may take out a loan for £23,000 to pay off the 3 debts, so going forward you only have the new loan to pay for.
Why you should think carefully about a debt consolidation loan?
Every clients situation is different and there is no one size fits all answer, so here are the reasons for and against:
- By consolidating your debts the new loan monthly payment could be lower and easing the financial strain you are under.
- As you only have one debt to pay for managing your money will be easier and can help with long term planning.
- With credit cards it is hard to know an end date of when the debts will be cleared, however with a loan you have a set end date to work towards.
- Potentially the new loan will be at a lower interest rate when compared to expensive credit cards which can be 20% APR+.
- Over time your credit score may improve if you can manage your outgoings better.
- Improving your credit score does take time and many factors play a part in effecting your score such appearing on the Voters Roll.
- If you consolidate unsecured debt such as credit cards and take out a secured loan, you are moving this debt on to your home, so if you are unable to make the payments your home could be repossessed.
- If the new loan is over a longer period than the existing debt it may well cost you more in the long run as you are paying interest for a longer period of time.
What other debt options are available?
Other debt solutions are available such as a Debt Management Plan (DMP) or an Individual Voluntary Agreement (IVA). When it comes to getting advice on these debt solutions you should speak to a firm which is authorised and regulated by the Financial Conduct Authority. The Debt Advisor is a firm which has many years’ experience in helping clients that are struggling financially.
Where can you get a debt consolidation loan?
High Street Banks and Building Societies do provide unsecured loans and they typically will lend up to £25,000 over a period of up to 5 years.
If you need to borrow more money and/or wish to borrow the money over a longer term the next option could be a secured loan. These types of loans are typically available through specialist mortgage brokers and they should also be authorised and regulated by the FCA.
What documentation is needed for a debt consolidation loan?
The documentation required will depend if the loan is unsecured or secured. Unsecured loans with your bank for example will be much quicker and straight forward as they already have a relationship with you and they can see your bank statements.
If you are seeking a secured loan, you will have to provide:
- Proof of ID – Passport or Driving License
- Proof of Income – 3 month’s payslips if you are employed or latest accounts if self employed
- Bank Statements – Last 3 months to confirm your outgoings
- Valuation Report – As your property is being used as security for the loan the lender will want the property valued.
Secured loans typically take 4-6 weeks to arrange, whereas an unsecured loan can be a matter of days.
As you can see there are many factors to consider and you should not rush this decision as it can have long term consequences. Seek advice from experienced professionals to help you come to the right decision.