In a consolidation loan, outstanding debts are combined into one loan which is used to pay creditors. You would then only need to make only one monthly repayment towards your debts – to the debt consolidation loan. Not all debts can be included in a consolidation loan, e.g. mortgages or car loans cannot be included.
Debt consolidation loans can often have better interest rates than you would pay with the creditor directly, so it can be a cheaper way to repay your debt. However, to qualify for a loan with a mainstream financial institution, you would need to be approved for the loan based on their credit rating. Alternative financial institutions who may accept debtors with lower credit scores might charge higher rates.
Cost: There is no fee to consolidate debts. However, you would need to pay interest on the consolidation loan and may also need to pay an administration fee.
You should obtain quotes from a range of financial institutions to ensure they are getting the best rates. However, checking with a number of financial institutions could affect your credit rating so it is important not to check with too many loan providers.
You review the terms of the loan and the reputation of the organization offering the loan. Once the loan has been approved, the financial institution offering the loan will usually pay the creditors directly.
You must make regular payments on the consolidation loan, as per the loan agreement.
Find out more: My Money Coach – information about selecting a consolidation loan | Steps to Justice – information about applying for a consolidation loan | Office of Consumer Affairs – information about consolidation loans