A consolidation loan is when you take out one big loan to pay off all your other debts. They used to be really popular, and were promoted endlessly by dodgy loans companies on TV. However consolidation loans can be a good idea – but you need to be careful. We’ll help you find out whether you need a consolidation loan, and how to go about getting one.

• What is a consolidation loan?
• Advantages
• Disadvantages
• When you should get one
• Alternatives to a consolidation loan
• How to get a consolidation loan
• What to watch out for

What is a consolidation loan?

A consolidation loan is when you take out a single, new loan to pay off several existing debts under one scheme.

It can be a useful way of taking control of your finances. It may work out to be the cheaper option.

Advantages

• If you find a loan that lets you pay a lower rate of interest then a long-term consolidation loan might be better value than short-term borrowing;
• You only have to deal with one lender;
• You only have to make one payment each month;
• It could stop you falling behind on repayments, and so stop you getting a poor credit rating

 Disadvantages

• If you take out a ‘secured’ loan as your consolidation loan then it will probably be secured against your house. This means if you fail to keep up repayments your house could be repossessed;
• The loans tend to be over a longer period, at first glance the interest rate might seem lower, but the total interest you pay may in fact be higher;
• If you have a poor credit rating you might only be able to get a loan with a high interest rate or secured against your home;
• The biggest problem with consolidation loans is that lots of people keep on spending on their old (newly empty) credit cards after taking out the loan. This means their overall debts get even bigger very quickly

 When should you get a consolidation loan?

1. You should only consider getting a consolidation loan once you’ve closed down all your other credit cards, loans and overdrafts so you can’t use them.

2. You must have started to live, and spend, more sensibly. If you’re not living within your means then you shouldn’t consider getting a loan. For more motivation read our article on taking control of your spending.

3. Make sure you can’t transfer your debts to one or more 0% credit cards. The Barclaycard Platinum card has 0% interest on balance transfers for 22 months, and the Virgin credit card gives you 0% interest on balance transfers for 20 months.

4. Ideally only if you have a loan that is flexible – this means that you can pay it off early and not be fined.

5. Ideally only if the loan is not ‘secured’ to your home. Some people can deal with a secured loan but only if they are already disciplined about their spending and have a good, regular income. If this isn’t you, a secured loan could be dangerous.

The problem with most consolidation loans is that most people don’t check that these boxes are ticked when people take them out. They just take on the new loan, pay off all the other debts, and then, when they have empty credit cards again they spend with those cards and end up with a worse debt than before.

Another problem is that if they’ve secured the loan to their home and they get into problems they’ll find that the lender can take away the roof over their heads. On paper it looks like a good idea, but the way a lot of people use the loans means these can make their lives much worse.

If you’re not sure, charities such as The National Debtline have free leaflets and self-help packs to give you some broad advice on dealing with your situation. For more detailed advice, you can call their Debtline free on 0808 808 4000.

Alternatives

Check your credit rating

If you think your credit rating might not be up to scratch then check out your credit score before wasting an application. Remember that each time you apply for credit and get rejected you get minus points on your credit rating ‘scorecard’.

Get a FREE 30 day subscription to Creditexpert and check your score before applying (just remember to cancel it at the end of the free period if you don’t want to continue with a monthly subscription).

0% credit cards

If you can you should transfer your debts to one or more 0% credit cards. The Barclaycard Platinum card offers the longest deal on the market with 0% interest on balance transfers for 22 months. The Virgin credit card gives you 0% on balance transfers for 20 months.

You’ll need a good credit record to qualify for the best ones so check out your credit score for free before applying.

Snowball your debts

This is the quickest and cheapest way to pay off your debts. List your debts with the largest interest rate at the top; pay as much as you can off the top one, while paying off the minimum on all other debts. For more detailed information check out our article on how to snowball your debts.

Secured loan

A secured loan is when you borrow money that’s secured against your house. For that reason these types of loans are only available to people who own their homes. They’re easy to get, you can borrow large amounts and for a longer period, but if you can’t keep up with repayments then your house will be repossessed. Read our article on the truth about secured loans.

 Unsecured loans

Weird as it may sound unsecured loans actually offer better security than secured loans. As you’re not securing it against your house, the lenders have nothing to take from you if you can’t keep up repayments, but this also means that interest rates tend to be higher than secured loans, and borrowing amounts might be less. Find out more about unsecured loans.

Moneymagpie Comparison page

Check the Moneymagpie comparison page to find the best loan for you – simply type in how much you want to borrow and how long for to see a list of the best deals.

How to get a consolidation loan

If you’ve decided that a consolidation loan is the best option for you, then follow these steps:

• Shop around to make sure that you get the best deal. Go to the Moneymagpie comparison page to find the best loan
• Make sure the loan is not attached to your house.
• If you’re not sure what to do get free debt advice then speak to one of these free debt advice charities:
  - Debt Advice Foundation
  - National Debtline
  - My Money Steps

Getting a consolidation loan can take one to four weeks depending on the bank you approach. You will have to fill in a form (probably online for the best deals) and you may have to prove your income and status.

It’s worth speaking to  your own bank too. Right now, banks are happier lending to people already on their books than people they know nothing about.

If you have a history of bad credit or large debts you may only be offered a secured loan because they think you are too risky to trust without some sort of collateral (something solid to sell so they can get their money back if you can’t pay). This will probably mean your home.

Put quite simply – it’s a very bad idea to add more of a debt burden to the roof over your head. If you have more problems paying that loan you could lose your house which is the last thing you need. And don’t be suckered in to taking out Payment Protection Insurance (PPI) with your loan. This should be avoided.

What to ask and what to watch out for

What to ask

As a basic checklist, make sure you ask these questions:

1. How long will I be making repayments for?

2. What is the total amount that I’ll have to pay back?

(This is good to check because even if the interest rate is low, if the loan is for a longer time you might find yourself paying back more.)

3. Are there any costs or penalties?

(These might occur if you miss a repayment, or if you decide you want to pay the loan back earlier than planned. This is particularly important if the loan is secured to your house.)

What to watch out for

• The APR (Annual Percentage Rate) that companies quote is not necessarily the rate that you will get on your loan.
• Don’t get PPI (Payment Protection Insurance) unless the lender insists on it. If you have to take out PPI, make sure you then cancel it within 14 days of getting the loan (you are legally allowed to do this).
• Try to improve your credit rating by paying off as much of your debts as you can.
• Work out which lender has terms best suited to your needs.
• Get a fixed rate loan, not a variable rate. You never know how high the rate could go with one of these.
• Check the TAR (Total Amount Repayable). This is more important in the long run than the APR.
• Beware of ‘arrangement fees’ on these loans. Sometimes they can be 1% or even higher of the total loan and will be paid up front or added to the value of the loan which means you would be paying even more over the long run.

A consolidation loan isn’t something you enter into lightly. Every person’s situation is different, so what applies to one person won’t necessarily apply to another – for confidential, free advice get in touch with a debt advice helpline.

Useful Links

• Debt Advice Foundation
• National Debtline
• My Money Steps
• Credit Expert