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Debt Consolidation Loans

Would you like to be able to pay off your current personal loans, credit cards, store cards, and other unsecured existing debts faster and cheaper than you are under your current borrowing arrangements?

Debt consolidation loan products are not for everyone, but you may benefit from finding out more about this popular type of finance with our Little Loans guide.

What is a debt consolidation loan?

A debt consolidation loan is a specific type of personal loan used by borrowers to clear their unsecured existing debts. They do this by taking out a brand new loan which they then use to pay their current creditors off in full.

Borrowers taking out loans for debt consolidation purposes use this type of financial product to settle debts like:

  • any outstanding personal loans (not secured on any property or asset)
  • the debt you have on your credit and store cards
  • bank account overdrafts

Why do this? If you're approved for a debt consolidation loan which has a lower interest rate than the interest rates you're currently paying to your creditors, it might actually cost you less to clear the debt this way than by sticking with your current set-up.

By taking out a "consolidation of debt loan", your monthly repayments may even actually be cheaper too if you get the right deal.

4 reasons why borrowers take out consolidation loans

You may have taken out a personal loan in one year to kit out a nursery for your home in time for the arrival of a new baby - that's never cheap!

In another year, you might have taken out a separate personal loan to cover a tax demand from HMRC.

You might have a couple or more credit and store cards. The average UK household owes £15,400 in unsecured borrowing and that borrowing might be spread over five or even more different credit accounts.

So why is consolidating all these different forms of credit a good idea for some people? The top 4 reasons are...

1. Makes financial management easier

If you have multiple credit accounts running at the same time, planning your personal cash flow can be hard. That's because you have to make sure that there's enough money in your current account to meet lots of different repayment dates during the month.

With this type of loan, you only make one repayment a month on a date you agree with your lender. Many borrowers choose that date to be the day on which they get their wages.

2. A fixed loan term - know the date you'll be debt free!

All of the personal loans you have now will each have their own end date - you'll know how many months you've got left until they're paid off.

Credit cards, store cards and overdrafts are different though. If you only make the minimum repayment on these types of accounts, you might be paying them off for a lot longer than you imagine.

Let's say that you have a balance of £1,200 on one of your accounts with your favourite retailer. The APR on the card is 39.9% and minimum monthly repayments are either 5% of the balance or £5 (whichever is greater). Your £1,200 of store card debt would cost you £1,404 in interest and take you 11 years and 5 months to pay off.

What about an overdraft? If you have an overdraft of £1,500 with an EAR of 19.9% and you live in your overdraft ( 2 million Brits do), then you'll be paying £22.54 a month before any other fees and charges - that's £270.48 a year.

As long as you only keep making the minimum monthly repayment, it could take you years (in some cases, more than a decade) to completely settle all of the outstanding balances on your credit card, store card, and overdraft debt.

With a debt consolidation loan, there is an end date - a set period of time that you have to pay it all back over.

And as long as you do actually use the loan to pay off all your existing finance providers when you actually get the money,

If you use the loan to pay off all of your existing finance providers when you receive the funds, the date you become truly free of unsecured debt will be the date of the final repayment of your loan.

3. One interest rate

Keeping track of each credit card, overdraft, and personal loan you have now is difficult. That's because each account you're running will often have:

  • monthly fees you have to pay whether you're using the facility or not, and
  • its own interest rates and charges based on how much you've borrowed and whether you make each repayment on time

Borrowers who consolidate debt with this type of facility have only the one interest rate to remember which applies throughout the life of the loan.

4. Our debt consolidation loans are not secured

All consolidation loan borrowing taken out through Little Loan's panel of lenders (all of whom are regulated by the Financial Conduct Authority) is not secured on customers' properties. Homeowners, tenants, and borrowers living with parents may apply if this type of loan makes financial sense for you and if you can afford the repayments.

Can I get a debt consolidation loan with poor credit?

What about borrowers who want to consolidate loan debt but who have a less than perfect credit history? Subject to status, many lenders are happy to consider applications from borrowers who have what could be considered a poor credit score.

Your credit rating is still very important to these lenders however, unlike many mainstream finance providers, they're also interested in and they take into account your current financial situation when considering your application.

Do consolidation loans hurt your credit score?

Every time you make a full application for a debt consolidation loan direct to a lender, it's recorded on your credit report - this is something called a "hard credit search".

Finance providers don't like to see too many hard credit searches on your report because it may make them think you're struggling financially.

So, by making multiple applications directly to different finance companies to see if you can get a better deal on the debt consolidation loan you want, your chances of being approved are likely to suffer because you're building up the number of hard credit searches they'll see on your report.

By applying through a broker like Little Loans, your application may be considered by multiple debt consolidation loan providers but only one hard credit search will be carried out. Find out how at the bottom of this guide.

Your credit rating will also be adversely affected if you're accepted for a loan, but you then don't meet all of your repayments in full and on time or if your account goes into default.

Are debt consolidation loans worth it?

When you search for an online consolidation loan, it's important to compare the difference any decision you take will make to your financial situation and to your personal circumstances.

What questions should you ask yourself when making your comparison? You should ask yourself - "if I take out a debt consolidation loan...

  • ...will I be better off as a result of this decision?"
  • ...will I be free of my unsecured debt faster?"
  • ...will I be paying more or less each month in servicing my debt and are the repayments affordable?"

Compare the financial consequences of how each of the following choices would affect you:

  • keeping the accounts that you have open now and just making the minimum repayments every month,
  • keeping the accounts that you have open now and paying more to each creditor each month than you currently are, or
  • taking out a debt consolidation loan

If you're worried about your level of debt in general, you might benefit from contacting StepChange, PayPlan, National Debtline, the Debt Advice Foundation, the Money Advice Service, or Citizens Advice.

What is the best loan to consolidate debt?

Consolidation loans offered by Little Loans' panel of FCA authorised and regulated lenders are unsecured - our lenders don't offer a secured loan product.

Want a quick simple quote with the possibility of receiving your loan direct into your bank account within minutes* if approved? This quote could let you know whether there is a better, faster, and cheaper way of clearing your unsecured debt.

You can apply for £100-£5,000 over a term of three months to three years through Little Loans. There is no fee for using our services.

Fill in our online application form - we'll then send your details to our partner lenders that are most likely to be able to offer you a debt consolidation loan.

They'll run a soft credit check on you and, as soon as we have a match (subject to status), we'll send you to their website so that you can complete their full application form. Please note that soft searches can only be seen by you and the lender and they don't affect your credit score either.

The finance company will then run one hard credit search on you before you receive your final personalised quote (if they approve your request).

If they do make you an offer, please read and understand all of the terms and conditions before you accept.

If you're happy with the terms, all that's left to do is to give your agreement on their website and you could be in receipt of your loan within minutes*.

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Representative Example: Amount of credit: £1200 for 18 months at £90.46 per month. Total amount repayable of £1628.28. Interest: £428.28. Interest rate: 49.9% pa (variable). 49.9% APR Representative. We’re a fully regulated and authorised credit broker and not a lender