Three signs a debt consolidation loan is right for you

A debt consolidation loan could help you manage your debts. Keep reading to learn if a debt consolidation loan is right for you.
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Struggling with debt? You’re far from alone. The average UK household debt was up to £65,756 in August of 2023, according to The Money Charity. Popular strategies for getting out of debt vary, but more and more people are turning to debt consolidation loans, according to a study from TransUnion.

So, is debt consolidation really a good idea? Here, we’ll highlight three signs that debt consolidation might be a good fit for you. Plus, we’ll cover three reasons you might want to avoid debt consolidation. Finally, we’ll share three alternatives to debt consolidation that can help you reduce your debts.

But before we dig into all that, let’s take a quick refresher on what debt consolidation is.

What is a debt consolidation loan?

A debt consolidation loan is a financial product that combines your existing debts into a single loan. For example, if your credit card debt, personal loan, and overdraft are getting out of control, a debt consolidation loan, well, consolidates them into a single loan.

How a debt consolidation loan works

When you’re approved for a debt consolidation loan, your lender will pay off your outstanding debts. Then, instead of making payments on multiple different debts in different places, you simply pay the single loan.

Debt consolidation loans can be secured or unsecured. A secured debt consolidation loan uses a valuable piece of property like your home or car as collateral. If you fall behind on these payments, the lender could seize your secured property. Unsecured debt consolidation loans are approved based on your creditworthiness and don’t use collateral.

Need a refresher on secured loans? Check out our article on the benefits and drawbacks of secured loans compared to unsecured loans.

Is debt consolidation right for you?

A debt consolidation loan could be right for you. If you recognize these signs, a debt consolidation loan might help you.

You’re at risk of missing payments

Missed or late payments are one of the most detrimental things to your credit score. Consolidating your payments into one that can be lower can help you make your payments each month. This can even help you improve your credit score over time.

You’re facing high interest rates

If you have a strong credit score and are facing high interest rates, you might qualify for a debt consolidation loan with a lower interest rate.

You’ve changed your credit usage habits

Debt consolidation is most effective when you’ve stopped adding new debt. This allows you to focus on making the single payment and getting your credit score back on track.

If debt consolidation isn’t paired with a change in behaviour, it can be more destructive than beneficial.

When debt consolidation might not be right for you

Debt consolidation can be helpful, but it’s not a financial cure-all. A debt consolidation loan might not be the right solution for you if you’ll pay more, if you have a low credit score, or if you haven’t looked into debt management.

Could you end up paying more?

Debt consolidation has some advantages, but it’s not always more affordable. You could face fees for taking the loan out and additional fees for repaying your other debts early.

Also, keep in mind that although your interest rate may be lower with a debt consolidation loan, the payment term is usually longer. This means that you could end up paying more in interest over time.

Do you have a low credit score?

If you have a low credit score, you might only qualify for secured debt consolidation loans. Secured loans can be risky because missing a payment could lead to losing your home or the vehicle you depend on for getting to work.

Plus, if you have a low credit score, you might struggle to get an interest rate that’s better than what you’re currently paying.

Have you spoken to your lenders about debt management?

Debt management helps you restructure current debt payments to be more affordable. If you’re considering debt consolidation, speak with your lenders and credit card providers about debt management.

Lenders and credit card providers are often willing to work with you, as debt consolidation can cause them to lose the money they’d have earned from interest.

Alternatives to debt consolidation

Debt consolidation loans may help some people, but it’s not the right solution for everyone. What options do you have if you’re not eligible or comfortable with the risks of a secured debt consolidation loan?

0% Balance transfer credit cards

If you have credit card debt, a 0% balance transfer credit card can give you access to an interest-free introductory period. This can be a great opportunity to pay down your existing debt without mounting interest.

Balance transfer credit cards can be risky if you haven’t changed your credit usage habits. Otherwise, you may find yourself with an even greater balance at the end of the introductory period.

Rethink your budget

If you’re struggling to make your payments each month, revisit your budget to make sure you’re allocating your income appropriately. Keep your eyes peeled for unused subscriptions, memberships, and impulse purchases that you can reel in.

While no two people have identical situations, you may be able to make your monthly payments much more comfortably after objectively assessing where your money is being spent.

Increase your income

Easier said than done, right? While it’s not always easy or fun, picking up a side hustle and earning a little extra cash can help you pay off debts faster. By paying your debts off sooner, you’ll pay less than you would if they accrue interest over time.

Debt consolidation: A brilliant tool when used wisely

If you’re already struggling with debt, taking out a new loan might not be the best decision. Without thorough due-diligence, a debt consolidation loan could leave you with a damaged credit score and more interest to pay off.

However, if a debt consolidation loan is a good fit for your circumstances, it could offer relief, flexibility, and even potential savings. If you’re going to use a debt consolidation loan, read the terms carefully and be confident about what you’re agreeing to.

About Pave

The Pave app is a tool that helps people across the UK improve their credit scores through education, bills monitoring, and direct credit building. To see why hundreds of thousands of Brits have downloaded Pave, head over to the App Store or Google Play to get started.