Caroline Roberts
12th October 2022
As expenses build up, many people take out personal loans, credit and store cards to manage their financial situation. These repayments can be in addition to those made on a home or car loan, and can mean multiple debts spread across a lot of lenders.
Over time these debts can become difficult to manage; they are payable at different times and will each carry their own conditions and interest rates. Furthermore any missed payments will accrue fees making staying on top of your finances even harder.
This is where debt consolidation can help. When you consolidate your existing debts, you bring them all together. As a result, this creates a single debt with one monthly repayment. For this reason, it can make the payment process simpler and reduce the stress attached to debt.
How can I get a debt consolidation loan?
Debt consolidation loans often have very rigid requirements. This is because borrowers looking for these loans have a lot of risk attached to them. Lenders see a lot of loans and debts and become wary of the borrower’s financial management.
On a general level, the lender will want a borrower to do the following:
- Show consistent and on-time home loan repayments for at least six months.
• Have no missed payments with the lender in question.
• Maintain a record of on-time credit card and personal loan repayments for at least three months. - Have a strong credit report.
• Earn enough income to cover the payment of the debt consolidation loan.
• Show a consistent employment record. Ideally the borrower will have worked with one employer for several years.
Major lenders usually won’t budge on these criteria. Therefore, if you can’t meet them, it may be best to speak to a specialist lender. Talk to an expert if you are uncertain.
How much can I borrow?
To be eligible for a loan to consolidate your debt, you must have equity in a property and be able to persuade lenders that you have your finances back under control.
How much you can borrow to consolidate your debt will depend on your personal circumstances:
- 90% of a home’s value: you will need to have a clear credit history that shows you make on-time payments for your loans and debts.
- 80% of a home’s value: some missed payments are allowed. However, you should still have a mostly stable record of making on-time payments.
- 75% or less of a home’s value: if you miss payments on every debt you have, the loan value decreases.
You will need to demonstrate to the lender that you can afford the loan to consolidate. Furthermore, the lender needs to be confident that your finances won’t spiral out of control again. A professional can help you explain your debts, and increase your chances of getting a debt consolidation loan.
How can debt consolidation benefit you?
You may wonder how rolling all your existing debts into a single loan repayment can help. After all, you still have the same amount owing. But debt consolidation can, in fact, make a big difference to your financial affairs. It provides the following benefits:
- Easier management of your debt – you are less likely to miss payments and accrue fees.
- Increased affordability – monthly repayments are calculated over an agreed loan term.
- Protection against bankruptcy and creditors – you pay off existing debts by taking out consolidation loan.
- Lower interest rates, in some cases – such as if you roll high interest debts into your home loan.
- Less stress – you are back in control of your finances
What are the risks of debt consolidation?
The main risk of debt consolidation is that you won’t change your spending habits and will continue to run up new debts. For example, with credit card balances cleared, there could be a temptation to start spending more than you can afford again. This would quickly grow your debts and lead to a worse financial position than you had previously.
Likewise it is important to ensure that the interest rate and any fees and charges you pay on the new loan are lower than those on the debts themselves. You need to be able to afford your repayments – the loan to consolidate is secured against your home, putting this at risk if you fail to make repayments.
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With Alexi Neocleous
The information in this article is general in nature. Please seek advice from a licensed professional when making financial decisions.This information in this article is general only and does not take into account your individual circumstances. It should not be relied upon to make any financial decisions. uno can’t make a recommendation until we complete an assessment of your requirements and objectives and your financial position. Interest rates, and other product information included in this article, are subject to change at any time at the complete discretion of each lender.