Is It Worth Consolidating Credit Card Debt?
Juggling multiple debts like credit cards and overdrafts can create financial noise, making it hard to plan your way forward. A debt consolidation loan is designed to simplify this by combining everything into one manageable monthly payment.
What Is a Debt Consolidation Loan?
Keeping track of various financial commitments each month can be complex. When you have money going to different places on different dates, it’s not always easy to see the full picture. A debt consolidation loan is a tool designed to simplify your finances by bringing everything together, allowing you to combine all your debts into one manageable loan – and one monthly payment.
This guide explains what a debt consolidation loan is, how it works, the benefit of making a single monthly repayment, and what you should consider before deciding if it’s the right step for you.
What Does a Debt Consolidation Loan Do?
A debt consolidation loan is a type of personal loan that allows you to combine your multiple debts into one. You take out a single loan to pay off your existing debt, such as from store cards, overdrafts, and other loans.
This process leaves you with just one loan to manage, meaning you only have one monthly payment to make.
How Does the Process Work?
Getting a debt consolidation loan typically follows these steps:
Calculate Your Total You add up the outstanding balances on all your existing debts to determine the loan amount you need. You can often apply online, allowing you to complete the process from your computer or mobile device.
Use the New Loan If your application is approved, you use the new loan to clear your existing borrowing with your other lenders.
Begin Single Repayments You are then left with just the consolidation loan, making one fixed monthly payment until it’s paid off.
When you get a quote for a loan, you will see some specific terms. It’s important to understand what these mean for you.
Key Terms Explained:
Representative APR: This is the typical interest rate offered to at least 51% of successful applicants. Your actual rate may vary depending on your personal circumstances.
Repayment Term: This is the length of time you have to pay back the loan. A longer term might mean lower monthly payments, but you could pay more in interest overall.
Repayment Holiday: Some lenders offer a temporary break from payments. While this can provide short-term relief, interest usually continues to build up, which increases the total cost of the loan.
“Rather than managing multiple card payments, a consolidation loan brings everything together into one simple monthly payment. We’re here to help you take back control and, most importantly, give you a clear path toward your debt-free future.”
Aseem Munshi
Updraft Founder & CEO
Types of Debt Consolidation Loans
Unsecured Debt Consolidation Loan
This is the most common option and doesn’t require you to put up any collateral, meaning your assets like your home or car aren’t at risk. This type of loan is often used for combining balances from credit cards, store cards, or other personal loans.
Secured Debt Consolidation Loan
This option uses an asset as security, which often means a lower interest rate is possible. However, it’s vital to be aware that your property would be at risk if you couldn’t keep up with repayments.
Balance Transfer
This usually involves moving debt onto a new credit card, often one with a 0% introductory interest rate. It’s important to check how long this promotional period lasts and what the interest rate will be afterward.
What to Consider Before You Apply
Before moving forward, it’s important to look at your personal circumstances.
Affordability: Make sure you can comfortably afford the new monthly repayments alongside your essential costs, like rent or mortgage payments.
Your Credit Score: Your credit rating is a key factor that lenders will look at and will influence the interest rate you are offered.
Total Cost: Always check the total cost of the loan. A longer repayment term could mean you pay more overall. Also, check if your existing loan agreements have any early repayment fees.
Soft and Hard Credit Checks: What to Expect
When you apply for a loan, lenders will check your credit file.
A soft credit check is a top-level look that doesn’t affect your credit score. Lenders use these to give you an idea of whether you’ll be approved. This is how you can check your eligibility with Updraft without any negative impact.
A hard credit check is a thorough review that happens when you formally apply. This is recorded on your credit file. Too many hard checks in a short time can be a concern for lenders.
Managing Your Debt Consolidation Loan
Once your loan is set up, managing it well is key. Setting up a direct debit is a simple way to ensure your payment is made on time. If your budget allows, making overpayments can help you pay off your loan faster and reduce the total interest you pay, but always check for any early repayment fees first.
Is This the Right Option for Everyone?
A debt consolidation loan could be a very effective way to manage debt, but it depends on your financial circumstances. It is a product for a UK resident, and it may not be suitable if you are in an Individual Voluntary Arrangement (IVA) or have County Court Judgments (CCJs). If you’re unsure, it’s always a good idea to seek impartial debt advice.
At Updraft, our debt consolidation loan calculator lets you explore your options without impacting your credit score.
Conclusion
A debt consolidation loan lets you simplify your finances into a single, manageable repayment. By carefully considering the terms and your own budget, you can decide if it’s the right choice to help you take control of your money and move forward with clarity.
Final Thought
Want to take control of your money? If you’re looking to consolidate credit card debt and cut down on high interest, download the Updraft app today.
Representative example
26.5% APR representative based on a loan amount of £10,000 over 60 months at a fixed interest rate of 21.9% p.a. This would give a monthly repayment cost of £286.65 per month, with a total cost of credit of £7,198.74 (includes loan fee of £400) and a total amount repayable of £17,198.74.
All figures are representative, the rate you are offered will depend on an assessment of credit worthiness and affordability. Terms and conditions apply.
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