Consolidating debts

Before getting a consolidation loan

Before you decide on a consolidation loan, find out what's on offer and what alternatives you've got. These could include:

• trying to make new arrangements with your existing lenders
• checking that you're making the best use of credit options you've already got, such as an overdraft facility, credit or store cards, a personal loan or extension to your mortgage
• borrowing money from relatives

Agencies offering free help and advice include:

• Step Change Debt Charity
• Advice NI

If you do decide to take out a consolidation loan, shop around for the best terms from a reputable lender. Building societies and banks may be able to offer you a personal loan.

Getting advice about loans

You should always get independent advice before taking out a loan.

There are many organisations offering free and independent advice to help you find the best way to deal with your debt problem, like Advice NI. Some financial advisers will charge you a fee for their services.

Advantages of a consolidation loan

Used carefully, a consolidation loan can help to put you back in control of your finances.

The advantages can include:

• paying a lower rate of interest – longer-term consolidation loans may be better value than short-term borrowing
• your monthly payments might be lower
• knowing when you'll finish paying off the debt
• you only have to make a single payment each month
• you only deal with one lender
• it may stop you falling behind on payments and getting a bad credit rating

Disadvantages of consolidation loans

Possible disadvantages to a consolidation loan include:

• if the loan is secured against your home, your property will be at risk of repossession if you can't keep up your payments
• you could end up paying more overall and over a longer period
• you usually pay extra charges for setting up and repaying the new loan
• all your eggs will be in one basket - if you get into difficulties, it may be more difficult to come to a new arrangement with a single lender
• if you have a poor credit rating, you may only be able to get a loan at a high interest rate or secured against your home
• if you don’t pay off all your existing debts, you may struggle to make the payments on top of the new loan

How to choose a consolidation loan

Always shop around for the best terms as it will save you money. Make sure you understand all the terms and conditions of the loan and that you can afford to keep up the payments on your consolidation loan.

You should check:

• how long you'll be making repayments and how much you'll pay back in total
• the interest rate and whether it can change
• what the monthly repayments are and what happens if you miss one, for example, you might be charged a penalty
• any penalties or costs you'll have to pay if you want to repay it early
• what happens if it's secured on your home and you can't keep up the repayments

Once you've arranged the loan, aim to keep your finances under tight control, for example, cut up your credit cards and don't let the debt build up again. Be aware that the lender may put pressure on you to borrow more by extending the loan.

You'll be encouraged to take out insurance with your loan. Make sure you're clear about the terms, that you really need the insurance and that you'll be able to claim on it if you need to.