Debt consolidation loans are like traditional loans, but allow the money from the loan to be used to consolidate debts already incurred (through credit cards, overdrafts, or other loans for example).
What is debt consolidation?
Debt consolidation is another word for refinancing, whereby you source a cheaper alternative for high cost existing debt, in order to reduce your current monthly payments.
For example: If you have a credit card charging 18.9%, a catalogue debt at 34.9%, and car finance of 13.9%, you could save on each of these by switching to a loan offering a lower interest rate.
Assuming you are approved for a better rate loan, and there are no early repayment penalties, you pay your existing debts with cash from your newly acquired loan and see your monthly payments drop considerably.
Should I consolidate my debts?
Debt consolidation can be a useful money-saving strategy, so it should certainly be considered if you are struggling financially. It also has the added benefit of simplifying your repayments to one single monthly amount.
If you're paid weekly, you'll need to ensure you save enough to cover your repayment when it is required, as the total may still be higher than any one single bill (albeit lower than the combined cost of all bills).
Before rushing ahead with an application, you should also consider whether a loan is your best option.
0% balance transfer cards can offer another cheap route to lower cost credit, as can money transfer credit cards. Money transfer cards have the advantage of enabling you to move part of your balance into your bank account, from which you can pay your current debts. Another advantage all credit cards have over many loans is that they offer revolving credit, and no penalties for early repayment, so, you won't be stuck paying interest on money you can already repay.
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