How Much Does A Debt Consolidation Loan Cost?

Debt consolidation can be a great way for people to manage their debts all in one place. If you are struggling to manage your finances in line with any existing debt, it could be worth looking into debt consolidation loans in order to keep your outgoings streamlined and organised. Yet there are a number of factors to consider when taking out any loans, including debt consolidation loans. Here, we will cover whether a debt consolidation loan could work for you and the factors which determine its cost so you can better assess your loan options moving forward.

Is Debt Consolidation Right For Me?

A debt consolidation loan is used to combine all of your existing debts into one pot. Borrowers will apply for a debt consolidation loan which is the total sum of their existing debts. Then, they will be able to pay off their debts using this loan and only have to focus on a single repayment plan every month. The aim of debt consolidation loans is to make it easier for borrowers to manage their repayments, rather than juggling a number of different debts. Though, as with any type of loan, particularly secured loans, it is always best to seek advice from professionals to ensure the loan is only beneficial to your situation and will not harm your finances in the long term.

How Much Does It Cost To Consolidate Debt?

As debt consolidation loans are designed to help manage any existing debt, the amount you need to take out will be entirely dependent upon your personal circumstances. Factors such as your existing loans, credit score, interest rates, and the loan term will all play a part in determining how much it may cost you to consolidate debt. Read below to discover how each factor can influence the cost of your loan.

Existing Debt

The purpose of debt consolidation loans is to pay off your existing debts and be left with one loan repayment plan. Therefore, the amount of existing debt you have will be a big influence on how much it may cost you to seek out a debt consolidation loan. For example, if you have three £10,000 loans to pay off, you may opt for a £30,000 debt consolidation loan to cover each of these payments. Any existing debt, whether it be student loans, mortgages, or personal loans will influence how much you take out.

Interest Rates

The cost of consolidating debt using a loan will generally include interest rates along with any other additional fees added by the lender. For instance, some lenders may charge you to repay your loan earlier than planned with what is referred to as early repayment fees. It is important to check your interest rates and extra charges before signing onto a debt consolidation loan. Seeking professional help and guidance might therefore be a good idea. It is also worth noting that the current interest rate on a debt consolidation loan is around 23%.

Loan Term

With loans, you will agree on a loan term with your lender which will be the length of time you intend to borrow the money. An average term length sits at around 4 years, though this can vary from lender to lender. The quicker you pay off your loan, the less interest it will have accumulated, meaning you will end up paying less. Yet this is not always possible due to early repayment fees as previously mentioned. Your loan term is consequently a key factor in establishing how much a debt consolidation loan may cost you.

Credit Score

A credit score is an indication of your creditworthiness as a borrower. The higher your score, the more likely you are to be successful in loan applications, as lenders will deem you as a reliable borrower who should repay their money appropriately. Therefore, if you have a low credit score, you could be at risk of being declined for a debt consolidation loan. To improve your credit rating, the best thing you can do is to pay off existing debts in a timely manner every month.