Debt Consolidation Loans: How to Consolidate Debt

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What’s the Difference Between a Debt Consolidation Loan and a Debt Consolidation Mortgage?

We will explore both on this page, but the principal differences are: 

• Debt consolidation loan

This type of loan is usually (though not always) unsecured. It can be a secured loan by way of a second charge mortgage on your property. A debt consolidation loan is similar to a personal loan but taken out with the purpose of clearing your existing debts.  

You borrow a specific amount in order to consolidate your other debts such as credit cards, loans, overdrafts etc. into a single loan payment that you make each month. The instalments are usually over a fixed term and via one consolidated payment route. 

• Debt consolidation mortgage 

A debt consolidation mortgage differs from a debt consolidation loan in that it is always secured against the equity in your home. However, the primary objective is exactly the same as a debt consolidation loan in that  the purpose is to clear some debts and simplify your financial outgoings. Instead of making multiple payments to different lenders you have just one payment to make to a single lender, and in this case, a mortgage lender. 

Generally you also have the option of repaying your loan over a longer period of time, which can cost you more, but reduces the stress if the short term focus is monthly cash and outgoings. 

Are you a homeowner? Click for more options on how to assess your debt consolidation options via a remortgage, using your mortgage or home equity. Assess your remortgage options for debt consolidation. 

Advisers at The Mortgage Broker are experts in homeowner solutions, secured debt and options with unsecured solutions for debt consolidation. Get in touch today to get started and get free, no obligation advice.

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What Is a Debt Consolidation Mortgage?

Having debt can be extremely stressful at the best of times and when you have multiple payments to make every month it can be difficult to manage your finances, which can start to feel overwhelming. 

A mortgage for debt consolidation is a way to use the equity in your home to pay off your other debts, leaving you with one monthly payment to make instead of several. 

Why use The Mortgage Broker to Consolidate Debt

Debt consolidation is easy to get wrong. You want a plan that’s affordable, realistic, and built around what lenders will actually accept, and we can offer you fast clarity from the outset, a structured plan, and remove all the stress from initial enquiry through to any solution.

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What Is a Debt Consolidation Loan?

In essence it is a form of debt refinancing where you take out a personal loan in order to pay off other borrowing you may have, for example store credit, a bank overdraft, credit cards or other loans.

There are advantages and disadvantages to taking out a loan for debt consolidation purposes, which we’ll explore, but the main reason borrowers choose this option is to make their overall debt easier to manage. It’s worth bearing in mind however that there are alternative ways of managing debt that are also worth exploring, such as a debt management plan arrangement with your creditors, or even voluntary insolvency. If you arm yourself with all the necessary information then you will be better equipped to make the best choice for your particular circumstances.

How To Get a Debt Consolidation Loan

If you are going to apply for a loan for debt consolidation, here are the steps to take:

1. Review your finances
Make a careful assessment of your income and expenditure, including an accurate figure of what you owe for any existing loans, credit cards, car finance, store credit cards, etc. What interest rates are you paying on your debts?

2. Check your credit score

If you decide to apply for a loan, a lender will check your credit report as part of the application process. You will need to meet the lender’s criteria to be approved for a loan.

3. Consider all your options

Seek advice from debt professionals or contact The Citizens Advice. It’s a good idea to explore all avenues before making a decision. Is the loan debt consolidation route the best option for you or, alternatively, could you maybe move your credit card debt onto a zero-interest card? It will depend on what borrowing you have and what solution makes most financial sense for your situation.

4. Get a personalised quote

Getting a quote should be free of charge and shouldn’t affect your credit score. This should give you an idea of how much you will be able to borrow. As a general rule, the better your credit score, the better rates you will be offered.

5. Find a lender who offers debt consolidation loans

Not all financial institutions will be willing to approve you for a loan for debt consolidation. Contacting a professional broker can help you greatly in this respect as they have the knowledge, experience and contacts in the industry to be able to advise you and help you to find the best lender for your specific needs.

6. Apply for a debt consolidation loan

When you have found the lender who is right for you, make your loan application. As part of the application process you will need to give permission to the lender to check your credit report. The lender will assess your creditworthiness and decide your eligibility for a loan and what rates you will pay.

7. Receive the funds

If you are successful in your application, you will receive the funds as a lump sum single payment. You can then use the money to pay off some or all of your outstanding debts.

8. Make your repayments

You should have a single monthly repayment to make each month in accordance with the terms and rates you have been given by the lender. It is recommended that you don’t miss any payments as this will negatively impact your credit score and affect any future borrowing options.

Is a Loan for Debt Consolidation a Good Idea?

A debt consolidation loan is a loan that you take out in order to clear any other borrowing that you have, thereby consolidating your existing debts into a single loan.

The main objective is to make your debt expenditure easier to manage – instead of having to pay multiple creditors on separate days of the month, you simplify your debts into a single monthly loan payment.
Before you go ahead with your application, it’s wise to weigh up the risks and rewards. Let’s look at some of the pros and cons:

Pros

• You simplify your debts

Replacing multiple debts with a single loan can be a great weight off your mind psychologically, Instead of owing money to several creditors you now just have a single monthly payment to make. This also makes it easier to manage and keep track of your finances.

• You may obtain a better interest rate

If your current borrowing on store cards, credit cards and personal loans means very high interest rates, then consolidating your debt could result in a superior interest rate.

• Reduced outgoings each month

If your debt consolidation loan is over a longer term and with better interest rates then you may end up with a lower debt payment to make each month.

• Improved credit score
  Although the process of applying for and getting a new loan will lower your credit score initially, over time it should improve as you have fewer debts owing.

Cons

• You may end up with a worse interest rate

The interest rate you receive on your new loan will depend on several factors, including your credit score. If your credit score is low then you may not be able to obtain favourable rates and they may even be higher than your current debts.

• Reduced credit score

As noted above, your credit score will probably take a dip to begin with, but should improve in time. The important thing is always to make your loan payments on time and slowly build up your credit score.
Keeping your lines of credit open will also help, although that carries risk with it which is worth taking into account. It’s also a good idea to avoid taking on any more debt.

• Potential to worsen your debt

Taking out a debt consolidation loan essentially is further borrowing. If you use the loan to clear existing debt then that can be advantageous, however, there is no obligation to close your credit cards, store cards etc so there is the temptation there to continue using them and racking up more debt.
If you reach a point where you can’t afford to make your payments then your financial situation will be considerably worse and if you default on payments your credit score will take a nosedive.

• Extended repayment period

Depending on the terms of your new loan you may end up repaying your borrowing over a longer time frame, so although you may have a smaller monthly payment, your consolidation loan could take longer to pay off.
Whether it is a good idea or not to consolidate your debts will depend on several important factors. It is advisable to take everything into careful consideration before moving forward.

Can You Get a Debt Consolidation Loan With Bad Credit?

Are you looking for a debt consolidation loan but have bad credit history? Having debt hanging over your head can be worrying and if you also have bad credit that can make your situation seem even worse.

You probably have lots of questions, such as;

• Can you get a debt consolidation loan with bad credit?
• Will a debt consolidation loan make my bad credit score worse?
• How do you go about getting a debt consolidation loan for bad credit?

Don’t worry – we will answer all of these questions and more and cover everything you need to know about this subject.

If you currently have a bad credit score you might be wondering if it’s even possible to get a debt consolidation loan due to your bad credit. The good news is, that we have bad credit experts and many of our lenders provide debt consolidation solutions to clients with bad credit. However, please do note, that of course we must review this on a case by case basis, and cannot guarantee there will be a suitable, sustainable and affordable solution for you bespoke requirements. We have to review these individually, but will of course use all our lender panel, all our expertise and work very hard to ensure you get the best chance of success.

With a solution possible, there is a downside that having a less than good credit score can cause, and that is your new loan may come with higher interest rates and costs. Again, we will consider these carefully and advise you throughout but will always advise on ways for you to improve your credit score, if at all possible, before making your application for a debt consolidation loan. You can read more around improving your credit score on our bad credit mortgages explainer page.

Can a Debt Consolidation Loan Help With Bad Credit?

If you currently have a bad credit score and debts you may feel that your case is hopeless, but don’t despair. You can apply for a bad credit debt consolidation loan in the UK even if you have missed payments, bad credit or even CCJs.
Knowing which lenders will be willing to consider you for a debt consolidation loan for bad credit will increase the likelihood of you being approved. Using a broker can help your chances considerably due to their expert knowledge and wide range of contacts in the industry.

Securing a debt consolidation loan can help your financial situation by:

Consolidating your borrowing: Combining multiple debts into a single monthly loan payment can simplify your credit and make it easier to handle

Reducing your monthly payments: Clearing other loans, credit cards, car financing, store credit etc means that you could end up with a single payment each month which totals less than your previous combined payments. Bear in mind that you will probably have to make repayments over a longer term.

Improving your credit score: Although initially your credit score may dip due to you making an application and taking on more borrowing, your score should start to improve because you have cleared several outstanding debts and made your finances more stable.

Note: there is no obligation to close your old lines of credit and in fact keeping your credit card accounts open will help your credit score – so long as you don’t fall into the trap of continuing to use your credit, building up more debt and overstretching yourself financially. If you take on more debt you run the risk of making your credit much worse.

If you have debts and a poor credit score there is still hope. As noted above, there are pros and cons, but a debt consolidation loan for bad credit may be a solution to get your financial house back in order.

Here at The Mortgage Broker we have years of experience in getting debt consolidation loans even with bad credit scores and will be happy to help you find the best lender to suit you. Contact us for a free consultation and a member of our friendly team will call you at your convenience to discuss your options.

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What lenders typically look at (especially with bad credit)

Lenders assess risk in different ways, but these themes come up again and again, and we can comfortably advise that these are the things we must consider:

Affordability first
Your income and essential outgoings matter more than chasing a headline rate. We must ensure we review your full set of options against your monthly expenditure and ensure that we approach any lender offering a solution that is affordable for you in your circumstances.

Recent payment behaviour
It is very normal to have late or missed payments, and we will advise on how best to present any that you may have. The best chance of success relies on your recent payment behaviour and we strongly advise to not take out any new credit lines whilst going through the application process as this can completely throw out any options. In the months preceding your application, focus on making all your payments on time as this will illustrate good reliability to a lender.

How much borrowing you have and how you use it
Lenders will look at how reliable you are on your current credit lines. If you are using them frequently, maxing out your credit cars, persistently in your overdraft or always close the limits, this can reduce your options. However, the best step is to get in touch and let us advise you on your current position, and we can work together in taking the steps required to remove the stress of your outgoings.

Major credit events
There are lenders that help with certain scenarios and at The Mortgage Broker we have homeowner solutions for CCJs, debt management plans, IVAs, and bankruptcy that are all reviewed on a case by case basis. These situations do not mean no automatically, and there are many lenders who support our customers but it is very important we understand clearly, and present the facts according to the lenders criteria, so that we can help you.

Too many applications in a short time
All our initial advice and any lender checks we do, will be soft credit checks with no impact on your credit file. This is because multiple hard searches can reduce your acceptance chances. Therefore, you shouldn’t be applying on your own and acting without advice, as you could negatively affect your chances further. If you have tried recently and been rejected by a lender for a debt consolidation loan, that doesn’t automatically mean you can’t apply again. We have over 100 lenders and many of those are only accessible via a mortgage broker, so it is important you explain your situation in full and let us approach the right lender for your circumstances.

Can You Use a Second Mortgage for Debt Consolidation?

One of the great advantages of a second mortgage is that it offers a great deal of flexibility in how you can use the funds. While many types of loans will specify what you use the funds for, the money from a second mortgage can be used for just about anything, making it a popular option for many people. You can read more around Secured Loans and Second Charge Mortgages here. 

Although there are few restrictions on how you spend the money from a second mortgage, the most common usage is for debt consolidation. Using a second mortgage to pay off debts can be a great way to get your borrowing under control.

By repaying and consolidating existing debts you can also improve your credit score, making future borrowing easier.

How Does a Second Mortgage for Debt Consolidation Work?

A second mortgage is in essence a loan taken out using the equity in your home as security (same as with a first mortgage). There are some key differences though which we’ll explore.

With a first mortgage you use your home as collateral and in the event of you failing to meet the mortgage payments the lender can assume control of your home.

Will a Debt Consolidation Mortgage Negatively Affect Your Credit?

Your credit score may take a temporary dip when you consolidate debts, but it should improve over time if you: 

• Always make your payments on time 

This is very important as your home could be at risk if you default on your mortgage payments. 

• Keep your current credit lines open 

Consolidating credit card debt for example just means that you clear the balance – there is no need to close your accounts, in fact closing your credit lines may worsen your credit score. 

• Avoid taking out any more debt 

Further borrowing can negatively impact your credit and may affect your ability to make your mortgage payments if you overstretch your financial commitments. 

Summary

There are risks and rewards involved with a debt consolidation loan or a debt consolidation mortgage which should be carefully considered. In consolidating multiple debts into one single loan you simplify your finances, which can make it less stressful for you in terms of administration and peace of mind, but that should be weighed up against a potential longer repayment period, higher interest and the risks involved with taking on more debt. If you are securing debt or borrowing more debt against the equity in your home, then we have to consider this carefully as your home could be repossessed if payments are not made continuously.

For expert advice, call us or get in touch via our application form and we can arrange a discussion at your convenience, to offer help and guidance with your debt consolidation loan questions.

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Our Top Debt Consolidation Mortgage FAQ’s