Debt consolidation loans - how do they differ from other loans?

18 May 2010

There are many different uses for a loan. Normally it`s for an expensive purchase - whether it`s a holiday, a new car or home improvements - but if you already have a number of debts and you want to rearrange your finances, you can also take out a loan to consolidate your debts.

How does debt consolidation work?

Debt consolidation involves taking out a new loan to pay off multiple existing debts. This leaves you with just one debt to manage, and one monthly payment to take care of each month.

This can be especially helpful if you`re looking for a way to organise repayments on things like credit cards and overdrafts, which may only require small minimum payments each month. By paying them off with your debt consolidation loan, you can arrange a repayment term that makes sure you`re paying off a reasonable amount of your debt each month.

It`s also possible to set out your repayments over a longer period of time than your existing debts. This makes each payment smaller, freeing up cash for other purposes. You may also be able to find a loan with a lower interest rate than your existing debts, which can bring down the cost further.

Just bear in mind that the longer it takes you to repay a debt, the more you`ll pay in interest.

Debt consolidation loans are only suitable for people with manageable debts. If your debts are already causing you problems, simply replacing them with another loan is unlikely to help your situation. In this case, you should look at debt solutions that can bring your debt repayments back down to an affordable level without borrowing more money, such as a debt management plan.

How are debt consolidation loans different to other loans?

On a basic level, a debt consolidation loan is no different to any other loan. You will apply in the same way as you would for any other loan (to a lender), and you`ll repay it in the same way - the only real difference is the purpose of the loan. And as with any other loan, you should only take out a debt consolidation loan if you`re confident you can afford the repayments.

While some lenders specifically offer debt consolidation loans, you can find a `regular` personal loan and use it to clear your debts. Your lender will usually ask about the intended purpose of your loan when you apply.

For more information on debt consolidation and how it could help you, click here or call 0800 161 3516.

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