Debt Consolidation Loans Explained
Debt consolidation loans are a very popular type of loan as they allow you to borrow
enough money to repay all your outstanding debts. You are than left with one monthly
repayment which is sometimes hundreds of pounds lower than you were originally paying.
This type of loan is approved on the understanding that it will be used to repay
the debts you already have, and these can include personal loans, credit cards,
hire purchase agreements and store cards.
Approval Criteria for a Debt Consolidation Loan
There are two different types of debt consolidation product. The first is a loan
for home owners and in this case the lender will expect to use your house or property
as pledged security. Because of this additional security though, you can apply for
a debt consolidation loan of up to £250,000. The amount you will be approved for
will depend on the equity in your property, your current finances and your current
credit rating. People with fair or poor credit ratings can also apply however they
will probably have to pay a higher typical APR than those with good credit scores.
The second type of debt consolidation loan is a tenant loan. This is suitable for
people who want to consolidate their debts but don’t own a property. Obviously the
amount you can borrow is a lot lower and generally ranges from £500 to £15,000.
The typical APR on tenant loans is nearly always higher than on home owner loans
because there is no security to fall back on in the event of non-payment.
Fees and Charges Associated with Debt Consolidation Products
Both types of debt consolidation loan come with arrangement fees. This is because
your new lender will probably want to make the payments to your current creditors
themselves. This in itself isn’t a bad idea as it stops you from using the money
for something else and ending up with even more debt. These loans also carry redemption
penalties in most cases which are payable should you manage to pay the loan off
before the credit agreement officially ends.
As a home owner borrower you will also be subject to valuation fees on your property.
These are instigated by the lender and are used to check you have enough equity
in your property to cover the amount you’re asking to borrow.
Debt consolidation loans are a great way to reduce the amount of interest you are
paying on your debts while also combining all your monthly repayments into a single
payment. They can save you hundreds or even thousands of pounds over the course
of the loan and are definitely worth considering if you are struggling to pay multiple
creditors each month.