Are you currently in a position where you are holding multiple debts with multiple providers? If so, not only are you likely paying extortionate fees in the form of interest, but you are also likely to be under financial stress. If you feel like there is no way out – there is, in the form of a debt consolidation loan. Whether your debts are tied to loans, credit cards, store cards, or overdrafts – a debt consolidation loan can clear your outstanding balances in one fell swoop. In return, you will now have a new, single loan with your new financing provider.
This will ensure that you only need to make one repayment per month, and most importantly, you can reduce the amount of interest that you are paying on your debts. If this sounds like something you would like to explore further, be sure to read our in-depth guide on the Best Debt Consolidation Loans of 2019. Within it, we’ll explain how a debt consolidation plan can get you debt-free once and for all, and what you need to consider in order to do this is in the fastest time-frame possible. Finally, we’ll cover the best three debt consolidation loan providers currently active in the UK market.
How does a debt consolidation loan plan work?
It is crucial to note that simply obtaining a debt consolidation loan and clearing your current debts is not the end of your desired journey of becoming debt-free. On the contrary, your new loan means that you still have a long way to go. In fact, you will now be obliged to meet your monthly payments on-time each and every month without fail. If you don’t, you’ll once again get sucked into the realms of debts, interest, and late payment fees.
With that being said, we would strongly advise you to read through the following step-by-step guide on how to engage in an effective debt consolidation plan.
Step One: Assess what debts you currently have
Your first port of call will be to sit down and evaluate what debts you currently have outstanding. You need to break each debt down by the name of the provider, the amount currently owed, and the specific repayment date. The last point is super-important, as the initial debt consolidation phase can take some time. As such, you need to ensure that you are still keeping on top of your monthly repayments – otherwise further complications will arise.
Step Two: Find a debt consolidation loan provider
Once you have assessed how much debt you are going to need to clear, you will then need to find a debt consolidation loan provider that meets your individual needs. By this, we mean finding a provider that has the capacity to offer you enough money to clear your debts in full. This is crucial, as you don’t want to be left with any outstanding balances whatsoever. On the contrary, you need to ensure that you borrow enough funds to clear the debts in their entirety.
Furthermore, you also need to ensure that the debt consolidation provider is suitable for your financial profile. In other words, if you are currently in possession of bad, or really bad credit, then you might need to go with a specialist lender that is willing to consider less than ideal credit scores.
In order to help you along the way, we have listed three of the best debt consolidation loan providers currently in the market at the bottom of this guide.
Step Three: Apply for a debt consolidation loan
Now that you have found a suitable provider, you will now need to go ahead and apply for the debt consolidation loan. In the vast majority of cases, you can complete the entire process online. If your circumstances are more complex, then it might be worth speaking to a representative over the phone. The most important thing that you need to get right is the amount. As noted above, you need to be 100% sure that you are applying for a loan that will cover all of your outstanding debts.
You also need to take into account a potential origination fee, which is typically deducted from the amount of funds you receive. Don’t worry, we’ll cover this – alongside any other fees that you need to be made aware of, further down in our guide.
To give you an idea of what you need to do when going through the debt consolidation loan process, check out the steps below.
- Enter the size of the loan and how long you need to borrow the funds for
- Enter details pertaining to your identity, such as your full name, address, date of birth, residency status, and contact details.
- Enter details about your current income, such as how much you earn, whether you work full-time, part-time, or are self-employed, and how frequently you get paid.
- Enter information pertaining to your current debts, such as who the debt is with, and to what value.
- Enter your bank account details. This is the account that you want the funds paid in to, as well as the account that you will be making your direct debit payments from.
Once the loan application has been submitted, the loan provider should let you know within a couple of minutes whether or not your application has been approved. If it has, you will then be shown your pre-approval rates. This will display the APR rate on the loan, the origination fee (if applicable), and what your monthly repayments will amount to. If you are happy with what has been offered, you will then need to sign the digital loan agreement to complete the application.
Step Four: Clear your debts
Once the application has been completed and fully approved, the loan provider should transfer the funds within a few working days. As soon as the money hits your bank account, you are then ready to kick-start your debt consolidation plan. Do not think about delaying the process, as it is crucial that you act NOW. As such, start working through each debt one-by-one. You can do this via your online account portal at the respective debt provider’s website.
You will need to select the option that allows you to make a ‘one-time payment’ with your debit card. Enter your card information, and most importantly, select the option that allows you to clear the balance in full. Once you submit the payment, the debt provider should update your account within a couple of days.
Log back in a few days later to ensure that the outstanding balance is set to ‘zero’. Once it is, contact your debt provider by telephone to ask them to close your account. This will remove the temptation for you to start reusing your credit limit in the future. Repeat the above process until all of your debts are clear.
Step Five: Ensure you make your repayments every month
The final stage of the debt consolidation plan is to now focus on your newly obtain loan. As noted above, you will already be aware of how much you need to pay each month, and it is likely that the lender will have asked you to set up a direct debit for this amount. As such, as long as you have enough money in your bank account to cover the payment, you will not be required to take any further action.
However, don’t become complacent. By this, we mean that you must ensure your bank account has sufficient funds every month to meet the repayment date. As a side tip, it might be worth requesting a repayment date with your new loan provider that falls just after your monthly salary date. This will give you the best chance possible of meeting your monthly payment without fail.
Best 3 debt consolidation loan providers
So now that you have a full grasp of what a debt consolidation loan is, and how you can best utilize one to get you that all-important status of ‘debt-free’, we are now going to discuss three of the best debt consolidation loan providers in the UK market. We utilize a strict set of criteria before listing a loan provider on our platform, so be sure to check out some of the metrics that we look for before recommending a lender.
Criteria used to rank the best debt consolidation loan providers
❓Lenders with the most competitive interest rates
❓How much the lender is able to offer
❓What credit score you need to obtain the debt consolidation loan
❓What length of time you have to repay the loan
❓What the late payment and missed payment process is
What is a debt consolidation loan?
In a nutshell, a debt consolidation loan is simply a personal loan that you take out with the intention of clearing your outstanding debts. While you might be thinking “It’s a terrible idea to take out yet more debt when I am already sinking in debt” – think again – as the benefits of doing this are two-fold.
✔️Turning multiple debts into one debt
First and foremost, if you are holding multiple debts with a range of different providers, this can be an awfully stressful situation. Think along the lines of holding debt across loans, credit cards, overdrafts and store cards. If this sounds like you, then you will know first-hand that making your repayments on time can be a logistical nightmare. You will most likely need to set up multiple direct debits throughout the month for each provider.
Moreover, if one of your direct debits fails because you don’t have enough funds in your bank account, then you’ll not only be accustomed to additional fees, but this will likely be reported to the main three credit agencies. As such, your credit score will be hampered even more. On the contrary, by taking out a NEW loan with a debt consolidation specialist, you can turn all of your outstanding debt obligations into a single debt with one provider. In doing so, you will only need to set up one direct debit agreement and thus – make one repayment each month.
✔️Reducing your interest payments
The second key advantage to engaging in a debt consolidation plan is that you stand the very real chance of reducing your interest payments. The amount that you are currently paying on your outstanding balances will depend on a number of key factors – such as the type of debt (credit cards, loans, etc.), and the provider behind the debt. For example, you might be paying 20% APR on your credit card, 15% APR on your store card, 550% APR on your payday loan, and 150% APR on your overdraft. With that being said, a debt consolidation loan could allow you to obtain a lower rate of interest.
Let’s look at a quick example to assess how this works in practice.
- You currently owe £5,000 on a credit card, £4,000 on a store card, and £11,000 on a personal loan
- This takes your total debts to £20,000
- To keep things simple, let’s say that you pay a base rate of 18% APR on all three debt instruments
- As you are only able to afford the minimum repayment amount each month, your interest is building in size month-on-month
- In order to take action, you decide to take out a debt consolidation loan
- The loan provider offers you a £20,000 loan at an APR rate of 11%
- As such, not only have you cleared all of your outstanding debts, but your loan comes with an APR rate that is 7% lower
How much will a debt consolidation loan cost?
So now that you know what you need to do to meet your objective of becoming debt-free via a debt consolidation loan, you now need to make some considerations regarding costs. As we have noted throughout our guide thus far, you need to ensure that the APR offered by the loan provider is lower than what you are currently paying. Otherwise, it effectively makes the process pointless, as you will be paying more in interest!
With that being said, there are a couple of other costs that you need to be made aware of when taking out a debt consolidation loan, which we have listed below.
? Origination Fee
The origination fee is charged by lenders as a means to ‘cover the cost’ of arranging the loan. This isn’t exclusive to just debt consolidation loans, but to many other loan types. However, not all loan providers will charge you an origination fee. If they do, then the specific amount can vary quite considerably. For example, the origination fee might be a variable charge that is based on your current credit score. In other words, if you have a really bad credit profile, then you might end up paying more than somebody that is in possession of a good score.
? Early Payment Fees
It is a sad state of affairs when everyday consumers are penalized for paying their debts off early, however, this is sometimes the case in the debt market. Once again, not all debt providers charge you an early payment fee, but if they do, then the specific cost can vary wildly.
We find that traditional personal loan providers are notorious for this, as an early payment means that they will receive less money from you in the form of interest. If you do need to pay an early payment fee with your current debt providers – pay it. At the end of the day, it is better to pay a small fee to obtain a status of ‘debt-free’, as opposed to keeping the debt open and paying extortionate interest.
? Late Payment Fees and Charges
You will also need to make some considerations regarding financial penalties that are charged if you fall behind with your new debt consolidation loan provider. On the one hand, you shouldn’t be taking out a debt consolidation loan if you think that there is the chance that you will miss a payment. Doing so will not only lead to a damaged credit score, but you’ll also be faced with additional fees.
However, this isn’t to say that you shouldn’t assess what the late payment fees are in the unforeseen event that you do fall behind. Unexpected life events will always happen, so it’s best to know what the financial consequences will be if you miss a payment. If the fees are extortionate, you should probably walk away from the application at the pre-approval stage.
What is the highest APR that I should pay on my debt consolidation loan?
While you should make every effort to ensure that you obtain the lowest APR rate possible, the main factor to consider is that your new interest rate is lower than what you are currently paying. Otherwise, it means that you will be worse off by taking out a debt consolidation loan.
What is the largest amount I can borrow with a debt consolidation loan?
The largest amount that you will be able to borrow will depend on a number of factors. This includes the specific lender, as well as your current credit score.
Should I still proceed with a debt consolidation loan if the loan size is less than what I owe in total?
You should rethink your plans to take a debt consolidation loan out if the loan size is smaller than what you owe. In doing so, you will still have multiple debts outstanding, some of which are likely to come with adverse interest rates. Instead, try to find a specialist debt consolidation lender that is happy to lend you the full amount.