Debt Consolidation Loans

A debt consolidation loan is not a suitable option for everyone, and careful research is required before you decide whether to search for one.

The Little Loans guide to debt consolidation loans explores some key information and answers some frequently asked questions.

Please be aware that the information contained in this article is meant as a general guide and does not constitute or should be taken as advice. For free, confidential debt advice, please contact any of the following charities and organisations:

StepChange, MoneyHelper, Citizens Advice, and National Debtline.

How does a debt consolidation loan work?

If you're looking to streamline your existing debt(s), a debt consolidation loan could be something to think about.

A debt consolidation loan works in the same way as a 'standard'loan in that you apply to borrow a sum of money from a lender, and then repay it in monthly instalments, including interest. Rather than using the money to cover the cost of an emergency expense, as you might with a 'standard' loan, you'll use it to clear the balance of any existing debt(s) that you might have.

Rather than making multiple repayments with numerous interest rates each month, you'll be left with just one repayment and one interest rate. This could make it easier to keep up to date with your finances.

Below is a brief rundown of how the debt consolidation loan journey could look.

1. Add up the total amount of money that you owe across your existing debts.
2. Apply for a loan that matches the amount of money that you need to clear your debts. Ensure that the interest on the new loan is lower than the interest you're paying on your current debt(s).
3. Use the loan to clear each of your debts until you're left with just the debt consolidation loan to repay.
4. Make your monthly repayments on the debt consolidation loan until the balance has been cleared.

Debt consolidation loans: things to bear in mind

• A debt consolidation loan is a serious financial commitment. Be sure to explore any options that may be available to you before you start your search.
• You should never borrow more money than you need or can afford to repay. Repaying a loan should never leave you unable to cover the cost of your essential monthly outgoings, such as bills and food.
• Check the terms and conditions of any existing loans. You could be charged an early repayment fee for clearing the balance before the scheduled term comes to an end. These fees should be factored in when thinking about any potential money saved.

What is Annual Percentage Rate (APR)?

The APR represents the yearly cost of the loan and includes interest and standard fees. The lower the APR, the lower the overall cost of the loan.

What type of debt could a debt consolidation loan be used to repay?

You could use a debt consolidation loan to clear the outstanding balance of any credit cards and existing personal or payday loans.

How much money could I apply to borrow, and for how long?

Little Loans is a credit broker. We work with a large panel of lenders, all of whom are authorised and regulated by the Financial Conduct Authority (FCA).

With Little Loans, you can search for a debt consolidation loan between the value of £100 and £10,000. Depending on the amount of money you apply to borrow, you could repay your loan from 3 to 60 months.

When you begin your search for a loan on little-loans.com, we'll ask you what you intend to use the money for. Simply select 'debt consolidation' from the list of options and we'll get to work searching for a suitable loan for you.

Please be aware that the lenders on the Little Loans panel offer unsecured debt consolidation loans only. We do not work with any lenders of secured loans.

Can I search for a debt consolidation loan with Little Loans?

You can use Little Loans to search for a debt consolidation loan if you meet our eligibility criteria.

You must:

• Be over the age of 18;
• Be a UK resident;
• Have a UK bank account and valid debit card; and
• Have a regular source of income paid into your bank account.

Can I apply for a debt consolidation loan if I have bad credit?

If you have bad credit, you should think very carefully before you take on another form of debt.

While it could be possible to get a debt consolidation loan with bad credit, you could be offered a high rate of interest. This could be more than the interest rate you're paying across your debts combined.

In addition to this, you might not be approved to borrow the amount of money that you need and may have to apply for a lower amount. This might not be enough to cover the debts you're hoping to clear.

How should I repay my debt consolidation loan?

A debt consolidation loan will be repaid in monthly instalments, until your chosen term expires. The monthly repayments will include interest.

Some lenders may allow you to make overpayments, which could help you clear the balance of the loan quicker and save on interest. You should not make an overpayment if it leaves you short when covering the cost of your necessary monthly outgoings.

If you'd like to, you might have the opportunity to repay your loan early, although depending on the lender, this could be subject to early repayment fees.

Using a debt consolidation loan calculator

An online debt consolidation loan calculator could help you decide whether this type of loan is a suitable option for you.

How will a debt consolidation loan affect my credit score?

A debt consolidation loan, like any type of loan, will affect your credit score.

When you apply for a loan directly with a lender, they'll carry out a creditworthiness assessment, which will include a hard search or Open Banking. A hard search will remain on your credit file for up to 12 months. If you make multiple applications for credit, you run the risk of multiple hard searches being carried out. Too many hard searches within a short space of time will have a negative impact on your credit score.

If you make your repayments on time each month and clear the balance of the loan within your selected term, you could see an improvement in your credit score.

If you make a late repayment or miss one altogether, your credit score will decline, and you could be charged a late fee by your lender.

What happens if I'm unable to repay my debt consolidation loan?

If you're struggling to repay your debt consolidation loan, you should contact your lender as soon as possible.

I'm struggling with debt; who can I talk to?

If you're worried about money, you can contact any of the following charities and organisations for free, confidential advice: StepChange, MoneyHelper, Citizens Advice, and National Debtline.