Debt Consolidation Loans: Could One Help You Manage Your Debts?

Managing several debts at once can be stressful. Credit cards, personal loans and store cards may all have different interest rates, payment dates and monthly repayments, making it harder to keep track of your finances.

A debt consolidation loan allows you to combine eligible existing debts into one new loan, leaving you with a single repayment to manage. Depending on the interest rate, fees and repayment term, it could make budgeting easier and potentially reduce the overall cost of borrowing.

However, debt consolidation is not right for everyone. Before applying, it is important to compare the costs, understand the terms and check that the new repayments are affordable.

What is a debt consolidation loan?

A debt consolidation loan is a type of personal loan used to repay multiple existing debts. These might include credit cards, store cards, overdrafts or other personal loans, depending on the lender's criteria.

Instead of making several repayments to different lenders, you would make one repayment towards the new consolidation loan.

For example, if you have outstanding balances across three credit cards and a personal loan, you may be able to borrow enough to repay those debts and bring them together into one loan.

You would then repay the consolidation loan over an agreed period.

The aim is to make your debts easier to manage. Whether it also saves you money depends on the terms of the new loan and the debts you are replacing.

Can a debt consolidation loan save you money?

Potentially, yes. But it is important to compare the total cost of borrowing rather than focusing only on the monthly repayment.

A consolidation loan might reduce the interest you pay if its rate is lower than the rates on your existing debts. However, a longer repayment term could mean paying more interest overall, even if the monthly repayments are lower.

Before deciding, compare:

• Interest rates: Is the rate on the new loan lower than the rates you currently pay?

• Monthly repayments: Will the new payment be affordable alongside your essential household expenses?

• Total amount repayable: How much will you pay over the full term?

• Fees and charges: Are there any arrangement fees, early repayment charges on existing debts or other costs?

• Repayment period: Will you be debt-free sooner, or will you be paying for longer?

It is also worth checking whether any of your existing debts have promotional interest rates that are due to expire.

A lower monthly payment can make budgeting easier, but it does not automatically mean the loan is cheaper.

What are the benefits of debt consolidation?

For some borrowers, consolidating debts can offer several practical benefits.

One repayment to manage

Combining several debts into one loan can simplify your finances. Rather than keeping track of different payment dates and amounts, you have one scheduled repayment to plan for.

A clearer repayment plan

A consolidation loan usually has an agreed repayment term. This can make it easier to understand how long you will be repaying the debt and plan your household budget accordingly.

The potential to reduce borrowing costs

If the new loan has a lower overall cost than your existing borrowing, you could pay less interest. This depends on the rate, term, fees and outstanding balances involved.

Less financial administration

Managing one repayment rather than several may make it easier to stay organised and keep track of what you owe.

These benefits depend on the terms of the loan and your wider financial circumstances. Consolidation does not reduce the amount you owe automatically, and it will not solve the underlying problem if your spending continues to exceed your income.

Is a debt consolidation loan right for you?

Debt consolidation may be worth exploring if you have several outstanding debts, want a more structured repayment plan and can afford the repayments on a new loan.

Before applying, ask yourself:

• Do I know exactly how much I owe across all my debts?

• Will the new loan cost less overall, or am I mainly reducing my monthly payment?

• Can I comfortably afford the repayments after paying for essentials?

• Have I checked any fees or charges associated with my existing debts?

• Can I avoid building up new balances on credit cards or other borrowing once they have been repaid?

It is particularly important to consider how you will manage your finances after consolidating. If you repay your credit cards using a consolidation loan but then start using those cards again, you could end up with the new loan and additional debt.

When might debt consolidation not be the best option?

A consolidation loan may not be suitable if the repayments would be unaffordable, the interest rate is higher than your existing borrowing, or the longer repayment term substantially increases the total cost.

It may also be unsuitable if you are already struggling to meet essential living costs or have fallen behind on priority bills such as rent, council tax or energy payments.

If you are finding it difficult to keep up with existing repayments, consider speaking to a free, independent debt advice service before taking on more borrowing.

Organisations such as StepChange, National Debtline and Citizens Advice can help you understand your options.

Can you get a debt consolidation loan with bad credit?

Having a poor credit history does not necessarily mean every lender will decline your application, but eligibility criteria vary.

Lenders may consider your credit history, income, regular expenditure, existing financial commitments and ability to afford the proposed repayments. Approval is not guaranteed, and the interest rate offered may differ depending on the lender's assessment.

Be cautious of companies that promise guaranteed approval or suggest that a loan is certain to improve your credit score.

Before applying, check the lender's eligibility criteria and consider whether the repayments would remain manageable if your circumstances changed.

Debt consolidation loans with BOOM Community Bank

BOOM Community Bank is a not-for-profit, member-owned financial co-operative offering loans to eligible members.

If you are considering a debt consolidation loan, it is important to understand the amount you need to borrow, the repayments you can afford and the total cost over the repayment term.

BOOM's loan options are subject to eligibility, affordability checks and lending criteria. Before applying, review the available loan information and make sure the proposed repayments fit your budget.

Take the time to compare your options

A debt consolidation loan could help simplify your finances and provide a more structured way to repay what you owe. In some circumstances, it may also reduce the overall cost of borrowing.

However, the right decision depends on your individual circumstances. Compare interest rates, fees, repayment periods and the total amount repayable before committing to a new loan.

If you are already struggling with debt, free, independent advice may help you identify the most appropriate next step.

Ready to explore your options? Visit BOOM Community Bank's debt consolidation loan page to find out more about the available lending options and eligibility requirements.