Could taking on another loan help you get out of debt?

If you are struggling with debt, it is an ongoing battle. You have to keep up with all the debt repayments, and constantly juggle money around to try and keep up. Which often means that there is not enough money to pay for something else that you need, so you end up borrowing and owing more, which only makes things worse.

It really does feel like an endless hamster wheel and there is no way to get off.

But did you know that taking out a new loan could actually be a possible solution?

In this article we take a look at the topic of debt consolidation loans, and explain whether this might be a potential option for you to consider.

What is a debt consolidation loan?

A debt consolidation loan is taken out specifically to pay off all other debts. 

For example, if you have four existing loans, two credit cards with money owing, and you also use your overdraft, you will be trying to make seven different repayments every month. But if you took out a debt consolidation loan for the total amount you owe between those seven creditors, you could use the loan to pay everyone off and have just one loan left.

Some lenders use the exact words “debt consolidation loan” in their range of loans. Others simply offer general personal loans which can be used as debt consolidation loans if you choose to do so.

The advantages and disadvantages of debt consolidation loans

As with anything to do with finances, there are some advantages and disadvantages to debt consolidation loans:

Three advantages of debt consolidation loans

• A debt consolidation loan immediately simplifies the rest of your finances. You can pay off everything else and be left with only one monthly payment to make. This can relieve the stress of having to juggle various payments. 
  • Also, if your finances improve, you can focus all your efforts into repaying just one loan, rather than trying to spread money around. 

• A debt consolidation loan is for a fixed term so you know exactly how long you will need to make repayments for. This is better than open ended debts such as credit cards, which can trap you into an ongoing cycle of debt.
  • You may even be able to pay off your debt consolidation loan early. Many personal loans allow you to pay off the balance before the end of the term, if you are able to do so, at no additional charge.

• Taking out a brand new loan and then managing it responsibly can actually improve your credit score. Keeping up with loan repayments, and month by month reducing your overall level of debt will refresh your credit score and gradually increase it.

Three disadvantages of debt consolidation loans

• One of the main risks of a debt consolidation loan is whether or not you will be accepted for the loan in the first place. Different lenders have different rules, but if you have a poor credit score this could be an issue. This is unfortunate because, as we have already seen, a debt consolidation loan could be a constructive way of getting out of debt and building your credit score again.
  • You can check your credit score with one of the three credit reference agencies in the UK: Experian, Equifax or TransUnion. But even if it is poor, don’t despair. Some lenders – including Loans 2 Go – offer loans for bad credit so take your time to look around and find the loan that is right for your circumstances.

• If you do take out a debt consolidation loan, it’s really important to use it to pay off your existing debts, and avoid spending more money and getting even further into debt. For example, once you pay off your credit cards, it can be very tempting to start using them again. But this could mean you end up back where you started or even worse.
  • So for a debt consolidation loan to work as intended, it needs to be in parallel with a disciplined fresh start financially.

• When taking out a debt consolidation loan, make sure you understand the amount of interest – and any additional charges – you have to pay. For example, the longer the duration of the loan, the lower the monthly payments will be. But you are likely to pay a lot more in interest because you are making more payments over a longer period of time. Similarly, some lenders may charge you to set up the loan, or if you decide to repay it early.
  • So if you are taking out a debt consolidation loan, be sure you know the overall amount of money you are paying as well as the amount of the monthly payments. It’s also essential to ensure that the lender is fully regulated by the FCA (Financial Conduct Authority);

We hope that the information in this article helps you to make the right decision as to whether a debt consolidation loan is for you. If you can afford the repayments, and are determined not to let your debts mount up again, it could be a good way forward for you.

And if you are looking for a debt consolidation loan, Loans 2 Go may be able to help. We offer a range of personal loans – including loans for bad credit – which could help you to repay off your existing debts and make the fresh start financially that you need

 For more helpful financial and lifestyle tips, visit us here again soon at Loans 2 Go.