Debt Consolidation Loan

The parameters that determine your eligibility for debt consolidation loans include your residential status, your age, credit score, and income, among other things. Find out how much you may borrow and how much it will cost before taking out a debt consolidation loan to avoid damaging your credit rating at any cost. While it may be tempting to submit an application right away, you can avoid rejection by first determining whether you qualify for a debt consolidation loan. Spend some time looking through lenders to determine which ones provide the best services and review their products to ensure that your application will be taken into account.

Different lenders may have set different loan eligibility criteria. Hence, go through the eligibility criteria of the lender before applying for the loan.

 What Factors Affect Approval of Your Debt Consolidation Loan Application? 

Lenders may have different criteria or processes to approve a debt consolidation loan application. So, it cannot be said that there are a predefined set of factors that affect your approval.

However, there are some parameters that generally impact the loan approval process and they are listed below:

•   Credit Score : Your credit score is an important factor that is taken into consideration by all lenders while assessing your loan application for debt consolidation. It determines your financial health and that is the reason lenders consider the rating.

Your credit score will help them determine the type of borrower you are. And accordingly, the rate of interest will be charged on your loan. If you have a low credit score, there is a chance of your application being turned down. 

•   Wrong Information: Be careful when you fill in the loan application form. Any wrong information shared by you may lead to the rejection of your application. To avoid this mishap, go through the form before submitting it to the lender. If you have any doubts regarding any of the information that is being requested to be shared by you, please contact the lender and get the much-needed clarifications.
•   Loan Amount: Before applying with any lender, check the maximum amount they are offering on their debt consolidation loan. There might be a chance, when the amount that you need may be higher than what the lender has to offer. It is always a good idea to get an understanding of how much the lender can offer and does that align with your financial needs.

Documents Required to Apply for a Debt Consolidation Loan

Lenders may need to check your financial health and history before deciding to lend any money to you. Although the documents required for a consolidation loan may vary from lender to lender. 

Listed below are a few standard documents that you be asked to submit by the lender:  

1. Proof of age 
2. Bank statement to prove your income 
3. Address proof
4. Details of the collateral or documents related to it in case of a secured consolidation loan

How to Apply for a Debt Consolidation Loan? 

To apply for a debt consolidation loan, first, you need to calculate how much of your debt you are aiming to accumulate. And after that, your search for finding a loan offer to consolidate your debts will be easier.

You can apply for a consolidation loan with the following steps: 

1. Accumulate your debts 
2. Figure out the exact amount you owe to the lenders
3. Decide the repayment period 
4. Fill in the application form on the lenders’ or loan brokers’ website with your personal and financial details
5. Apply online and get quotes from lenders and compare their quotes to find the best rate possible for your circumstance
6. Check the offered APR and try to borrow a loan with a real interest rate. 
7. Pick the best offer and close off the deal

Different Types of Debt Consolidation Loans

Generally, there are four types of debt consolidation loans:

• Secured 
• Unsecured
• Balance transfer credit cards

Let us take you through both of them one by one.

Secured Debt Consolidation Loan 

Loans that are secured by an asset, typically your home, are known as secured loans. The lender may be more open to considering larger loans at cheaper interest rates as well as applications from borrowers with less favourable credit histories because you are using your home as security against the debt.

Not taking this decision seriously could result in you losing your home if you fail to make any payments.

 Unsecured Debt Consolidation Loan

For the majority of borrowers, a debt consolidation loan is similar to any other personal loan that they may take for a vacation, to buy a new car or for a home improvement. “Unsecured,” means that it is not secured by your property or any other asset.

Missing a payment could have a negative effect on your credit score, which could hinder your future ability to borrow. Personal loans without collateral are used to consolidate debt.

Your interest rate will be determined by your credit history, your financial situation, and the terms and conditions set by the lender.

Managing debts requires careful planning and a detailed layout strategy with a financial backup. Without any of these, it may become difficult for you to pay back the lenders who you owe money. Not repaying the loans can have repercussions on your financial health.

Consolidating multiple debts into one is a wise idea, however, you must know how to consolidate different types of debt. You may have only credit card debts or a mix of credit card and bank loans. Different types of debt must be dealt with differently for efficient debt management.

Credit Card Debt Consolidation

Credit card debt consolidation means accumulating all your credit card debts into one credit card. So, instead of paying different interest rates on different cards, you will have to pay a single interest rate on one credit card. Also, there will be only one repayment date making it easier for you to track your repayments.

Generally, people use a balance transfer card to consolidate their credit card debts. Choose a card that has a lower interest rate so that your monthly repayment amount will be lower.

Ensure that you choose your balance transfer card after checking the interest rate otherwise, you may end up paying more in interest in the long run.

Consolidating Personal Loans and Lines of Credit

If you have multiple personal loans of lines of credit, you may rely on a personal debt consolidation loan. A personal debt consolidation loan doesn’t require you to use collateral. However, the interest rate of this loan may be slightly higher than a secured loan due to this reason.

Different lenders have different lending criteria. So, the amount of money that you can borrow from a lender to consolidate your loans will vary from lender to lender. Some lenders may allow you to borrow up to £25,000 while others may allow £20,000.

 It is always a good idea to check with the lender before submitting your debt consolidation loan application.

Consolidating Payday Loans and Other High-Interest Loans 

Payday loans are high-interest rate loans. These are quite expensive, and hence, you should try not to fall back on the repayments of a payday loan.

If you have such type of debt, you can choose between a secured or unsecured debt consolidation loan. Depending on the loan amount you want to borrow, you can choose the type of loan you want to opt for.

Choose a loan that has a lower interest rate to help you bring down the overall cost of the loans you have.

The loan amount you must borrow should be enough to help you consolidate your debts. To determine how much you need to borrow, you will have to calculate the exact amount that you owe to all the lenders or credit card companies.

The amount that you can borrow depends on the lending criteria set by the lender you are planning to borrow from. Also, your credit score and borrowing history will be taken into consideration by the lender.

You can use a debt consolidation calculator to determine how much you can borrow and how much you will have to repay if you borrow the loan.

Debt Consolidation Loan Repayment Period and Options

The loan repayment period can be chosen by you as per your financial horizon. Also, you will have to check the repayment periods offered by the lender. Remember, the longer your repayment period, the more you will pay on interest over time.

Debt Consolidation Loan Interest Rates and Fees


Fixed Rate Vs Variable Rate Debt Consolidation Loans 

With a fixed rate of interest, the monthly repayment amount is fixed. It gives you the bandwidth to plan and stay on track with your budget. However, a variable rate of interest loan doesn’t have a fixed interest rate. With changing interest rates, the monthly repayment amounts will have to be paid.

Interest Rates and APR for Debt Consolidation Loans 

The interest rates will vary widely from lender to lender. Rates may be lower for those with a good credit score, while rates may be higher for those with bad credit. Banks and lending companies may offer personal loans by using representative APR, which also makes it easier for you to evaluate debt consolidation loan options available in the market.

The representative APR represents the interest rate that the typical borrower will pay when their loan application is accepted. In actuality, the typical example indicates that this interest rate or a better rate was offered to 51% of loan applicants.

But keep in mind that the typical APR example depends on your loan application amount, credit history, and personal financial situation. The APR rate you are given may be better as compared to the illustrative example.

Factors Influencing the Interest Rates of a Debt Consolidation Loan

The interest rate of any loan depends on a range of factors and the factors may vary from lender to lender. The deciding factors considered by all the lenders may not be the same, however, there are a few common factors that are usually considered across the market.

We have listed below the common factors that influence the interest rate of a debt consolidation loan:

Credit Score and History 

Your credit score and history will be taken into account by lenders or financial institutions while assessing your loan application for debt consolidation. With a low credit score, the interest rate will be high. And with a high credit score, the rate of interest will be low as the risk of defaulting on the loan is low.

Loan Amount 

The amount of loan you apply for also plays a crucial role in deciding the rate of interest. Also, the loan amount you apply for will decide whether you can borrow a secured consolidation loan or an unsecured debt consolidation loan. With a higher loan amount, chances are high that you will be getting offers for a secured loan. The interest rate will be low on a secured loan as it will be tied against an asset.

However, if the loan amount you are applying for is low, you can borrow an unsecured personal loan. As this loan will not be tied against any collateral, the interest rate will be higher than a secured loan.

Repayment Terms 

The repayment term chosen by you also influences the interest rate of your debt consolidation loan. A longer repayment term means smaller monthly payments. So, the interest rate will be high. If the loan repayment period is shorter, the monthly payment value will be higher. It will attract a lower rate of interest on the loan.

However, you should always choose a repayment period that you are comfortable with so that you do not fall back on the repayments.

Loan Arrangement Fees and Other Charges (H4 Tag)

When you borrow a loan from a lender you will have to pay a loan origination fee to them. This fee can be considered as an arrangement fee you have to pay the lender for helping you borrow a loan. The amount will depend on your loan value and may vary from lender to lender.

If you are looking to apply for a debt consolidation loan, you can borrow it from a lender directly. Or, you can use a broker’s service to find a loan with an interest rate that best suits your financial circumstances.

Banks and Financial Institutions Offering Debt Consolidation Loans

Many reputable banks and financial institutions offer products to help you combine your debts for easy debt management. They are frequently termed personal loans. However, because they can be used to consolidate debt, they sometimes go by the label of debt consolidation loans.

If you wish to borrow from your bank, and you do not have the required clarity, you must contact your bank to get the details. Understand how the loan will work and whether will it be beneficial for you.

Online Lenders Specializing in Debt Consolidation

There are various lenders in the UK who offer personal loans to help you consolidate your debts. When you are deciding to borrow a loan from an online lender, ensure the lender is registered with the Financial Conduct Authority (FCA). Dealing with a lender who is not authorized to conduct business by the FCA may result in a financial scam. You may become a victim of a fraud.

Also, borrowing a loan from online lenders is easy and smooth. You can apply for a loan from the comfort of your home without the need to step out. All you have to do is find the best lender for debt consolidation as per your personal circumstance and fill out their application form. The lender will assess your form and decide accordingly.

Comparison of Interest Rates and Terms with Multiple Lenders

It is always a wise idea to compare different quotes in terms of interest rates with multiple lenders. Comparing loan quotes will give you a clear picture of what is being offered. Accordingly, you can choose the best offer as per your circumstance.

Let us understand this with an example. You found a loan quote that seemed fine to you and you got the loan approved. The next day, you found another offer that has a lower interest rate than the one you got approved for earlier. That means you could have saved more on the interest if you had compared the loan quotes.

Borrowing a personal loan for debt consolidation with real APR can help you save money on interest. LoanTube offers a platform where you can compare loan quotes with real APRs from multiple FCA-registered lenders within minutes for free.

All you have to do is fill in the application form quickly, sit back and relax. Let us do the work for you. The lenders on our platform will review your application and offer interest rates. You can see their offers on your screen within minutes of hitting the submit button. Real APR means the interest rate a lender has offered you on the quote screen will not change afterwards when you accept their offer.

Things to Consider for Choosing a Reputable Loan Provider

Financial decision-making demands your undivided attention. Otherwise, you may end up spoiling your financial health in the long run. When you are trying to borrow a loan, you must borrow it from lenders or loan providers who are reliable and trustworthy. But with so many options available in the market, how would you know who to trust?

Let us help you understand how to identify a trusted loan provider for your financial needs.

Listed below are a few things you should consider while choosing a lender:

FCA Authorized : This is the first thing you should consider while choosing a loan broker or a lender. When you deal with an FCA-registered entity, any grievances you might have in the future can be resolved legally. However, dealing with an entity that is not registered with the FCA can be damaging to your financial health. You may become a victim of financial fraud and lose money in this journey.

Secured Website : Visit the website of the lender or broker to check if their website is secured. You have to share your personal and financial details while filling up the application form. Ensure the site is secured so that you do not become a victim of data theft. A secured website will have a SSL certificate and you can check that in the URL. If the URL has “https” then the site is secured. If it is not, do not share any details on the website.

Customer Reviews : Another good way to check if the lender or broker is reliable is to gather information from the customers. Read the online reviews and if possible check with the customers through their social media profiles on their experience with borrowing from that particular lender. It will give you clarity and the right direction for going ahead with your decision.

Your credit score will be taken into account by lenders or financial institutions while assessing the debt consolidation loan application. It is not the only deciding factor but it can be said that it is one of the deciding factors for your loan. Your credit score and rating will help the lenders to set an interest rate.

Impact of Debt Consolidation Loan on Your Credit Score 

When you apply for a debt consolidation loan, the lender will check your credit report. A hard credit check takes off a few points from your score and it reflects in your history.

Suppose you applied for a loan with a lender, and the lender checked your credit report. Later the offer you received from the lender didn’t seem that catchy to you. So, you turn down the offer. Or, the lender rejected your loan application due to any other reason. In future, when another lender will check your credit history, they can see that your application was turned down initially. This may impact their decision to lend.

There is one more way a debt consolidation loan impacts your credit score. If you do not repay the loan on time and regularly, your credit score will take a toll.

Rebuilding Credit Score after Debt Consolidation 

When you decide to take a consolidation loan to combine all your debts that means you would have been struggling with the repayments. Missed repayments negatively affect your credit score.

With a debt consolidation loan, you have a chance to rebuild your score. If you make all the repayments on time and in full, your credit score will improve over time.

Managing Credit Responsibly During and After Consolidation 

Before you borrow a debt consolidation loan, calculate how much you have to pay back to the lender each month. Do you think you can manage the repayments? Create a monthly budget beforehand so that you do not miss any of the repayments.

Choose your repayment period carefully as per your personal circumstance.

If you think you will miss the repayment date you can set up auto debit. Select a date and the payment will be automatically deducted from your account on the set date. This way you will not have to remember to make the repayment. Ensure there is enough money in your bank account that you link so that the repayment doesn’t fail.

Addressing Credit Issues Before Applying for a Debt Consolidation Loan 

If you are already facing issues with debts, you should contact a certified debt management organization to help you rather than apply for a debt consolidation loan.

You have a number of options to choose from if you need assistance managing your debt. These consist of individual voluntary agreements (IVAs), bankruptcy, debt relief orders, debt management plans, administration orders, and debt consolidation. 

There are a few things you may consider doing to help you get out of debt if you have numerous bills and are having trouble making your payments.

You must speak with your creditors and work out a payment plan, or you could formally enter into a “debt solution” agreement.

Debt Management Plans (DMP) 

You can settle your obligations at an affordable cost with the help of a debt management plan (DMP). If you have non-priority debts like credit or store cards, overdrafts, or personal loans – a debt management plan can be the right option for you.

Your DMP provider will assist you in negotiating a manageable payment with your creditors. You pay the DMP provider with a single monthly payment, and they pay your creditors on your behalf.

You can use a Debt Management Plan only for the following type of debts:

• Overdrafts 
• Personal Loans 
• In-store Credit Card Debts 
• Home Credit 
• Store Cards 
• Payday Loans 
• Bank or Building Society Loans 
• Money that you have borrowed from friends and family

Many free debt counselling agencies can assist you in determining whether a DMP is the best option for you, and some can set up a plan to make sure that all of the money you contribute goes towards paying off your debts.

If you choose a fee-paying service, you must ensure that the organisation is licensed by the Financial Conduct Authority (FCA).

Individual Voluntary Arrangements (IVAs)

A formal and legally binding agreement between you and your creditors to repay your obligations over time is known as an Individual Voluntary Arrangement, or IVA. You can include any amount of debt in your IVA. There are no upper or lower limitations on the amount. You will negotiate a repayment schedule with the insolvency practitioner if you choose to file for an IVA. A lump sum payment, regular payments, or a combination of both may be used.

Your creditors must approve the repayment plan, which should be based on an amount you can afford. The IVA will often last for 5 or 6 years if you’re making monthly payments.

You will pay the insolvency practitioner your debts. They will divide the remaining funds among your creditors after keeping a portion for themselves.

While you are on an IVA, the insolvency practitioner will assess your circumstances once a year. 

Debt Settlement and Negotiation 

Another strategy you can use to try and get your debt under control again is to make a settlement offer to your creditors. Because you can focus on paying off as much of the debt as you can in one go rather than having to make regular monthly payments. If you think you should consider this option and your financial capabilities allow you to do so, talk to your creditors. Generally, with a debt settlement, you do not have to pay the entire amount you owe to the creditors. The idea is to bring down the debt value so you can pay it off in one go. 

You can also negotiate with your creditor if you do not agree to their settlement offer. 

Bankruptcy Considerations and Alternatives 

If you are unable to pay your obligations, you must file for bankruptcy in order to relinquish possession of your assets. You can restart your finances after you file for bankruptcy. 

There are three ways to declare it: 

• Voluntary declaration 
• Involuntary declaration (The creditor does it)
• By a supervisor 

You cannot use your bank accounts when you declare bankruptcy as your accounts will be frozen. 

Let us consider debt consolidation loans vs other available financing options which will give you an idea of what suits you the best to get rid of your debts.

Comparing Debt Consolidation Loans with Personal Loans 

Debt consolidation loans are personal loans that you can use to consolidate your debts. Depending on the amount of debt you have, you can choose to borrow a secured or an unsecured personal loan. 

You borrow a debt consolidation loan at a set interest rate and then rather than paying multiple creditors, pay back only one. This will be much easier for you to track as you do not have to deal with multiple lenders anymore. 

Home Equity Loans or Lines of Credit for Debt Consolidation 

A home equity loan can be used for debt consolidation or to pay off other debts, such as mortgages. Although they typically have lower interest rates, home equity loans and home equity lines of credit (HELOC) are methods of obtaining credit based on home equity that put your house at risk.

The fact that your home’s equity is utilised as collateral for a loan or HELOC is its major drawback. In the event that you stop making your monthly payments, the lender will be able to sell your house. These loan options have low-interest rates compared to other personal finance solutions, which is the trade-off. 

Balance Transfer Credit Cards Vs Debt Consolidation Loans 

Cards with balance transfer options provide 0% interest rates for a specific time. If you have multiple credit card debts with high-interest rates, a balance transfer credit card becomes a tempting option. Remember that the promotional periods and costs for balance transfers often only apply to transfers made during the first 60 days after account opening. You risk losing the promotional low interest rates if you don’t adhere to the terms and conditions. Your APR will probably increase noticeably after any initial low interest rates. 

However, with a debt consolidation loan, the APR will remain the same throughout the term of the loan. 

Considering the Best Option for your Specific Debt Situation 

It’s crucial to communicate with your creditors before looking into any debt relief options. You might be able to work out a deal with them to settle your debts, or you might gain extra time to sort things out.

Weigh all the options that are available and make a decision wisely. Take help from authorized debt assistance organizations to understand your options in a better way before making any decision.