Considering a debt consolidation loan from a bank could be a good idea. Bank consolidation loans have some of the lowest representative APR rates on the market right now. Read on to uncover all of the key details about these types of personal loans and which banks have the lowest debt consolidation loan interest rates.
Before choosing a lender, we recommend seeking free debt advice from a UK charity. This will ensure that you’re choosing the most advantageous route out of your debts and provide extra support.
How can I get all my debt into one payment?
Moving all your debt into one fixed monthly repayment is known as debt consolidation. Doing so will make it easier to manage your finances and budget to repay your debt. Instead of having many monthly repayments to consider at different times of the month, you’ll have fewer or even just one fixed monthly payment.
It is possible to achieve debt consolidation in different ways, and the best method for you will depend on your personal circumstances. The options are:
- Balance transfer credit card (only for credit card debts)
- Debt Management Plan
- Remortgaging/second charge loans on property
- And the method we’ll be discussing today – a loan
A balance transfer card is only used to consolidate other credit card debts. A Debt Management Plan agrees a new repayment plan with multiple creditors where a single payment is split between them. And remortgaging for debt consolidation releases home equity to repay debts while making your mortgage bigger.
What is a debt consolidation loan?
Debt consolidation loans are a type of personal loan used exclusively for the purpose of adding your debts together. This is not the only example of a personal loan having an exclusive purpose; you can also get car or home improvement personal loans. And let’s not forget about mortgages, although they are secured whereas debt consolidation loans tend to be unsecured.
Some personal loans that are advertised for no specific purpose can be used to consolidate debts. However, you should always check the terms and conditions before you apply for a loan to ensure you can use it as you intend.
Do you need to have credit arrears?
You don’t have to be in arrears, i.e., have already missed repayments, to consolidate debts. Anyone can think about consolidating their different channels of credit for convenience and for a better repayment deal. In fact, many people use this method even when they’re paying their current credit easily. If there’s a better deal to be had, there’s no reason not to consolidate.
Do debt consolidation loans really work?
A debt consolidation loan could work if you keep up with the new repayments. Merging your debts into one loan has been a proven debt mitigation strategy for years.
You must make sure the loan is right for your circumstances and reduces the interest you pay. Not choosing the correct loan with the right terms will not allow you to save at the same time as consolidating.
How do I get a debt consolidation loan?
You can get debt consolidation loans from banks. Most high-street banks offer new and existing customers the chance to apply for a loan to consolidate debt. Whether you choose a bank debt consolidation loan or one from an online lender, always make sure they are legit by checking they are authorised and regulated by the Financial Conduct Authority (FCA).
The basic eligibility criteria will make sure you are 18 years old or above and are a UK resident. Your credit score and income will also be checked to make sure you have proven to manage your money satisfactorily and can afford the loan amount, respectively.
Applications for these loans can usually be completed online on the bank’s official website or through internet banking if you already have an account with the bank you’re applying to.
What credit score do I need for a bank debt consolidation loan?
Credit reference experts, Experian, state that to be approved for a bank debt consolidation loan you need to have a good or excellent credit score rating. However, those that want to borrow with a poor credit score may still be able to do so. They are more likely to be offered a higher rate of interest, which could make debt consolidation unworthwhile.
Does a debt consolidation loan go into your bank account?
Most of the time the money from a debt consolidation loan will be deposited into your bank account. If you’ve applied for a loan with the same bank that you have your current account with then the funds are typically deposited within the same day of approval unless you apply on bank holidays. If you are getting a debt consolidation loan from a bank you don’t have an account with, it can take a little longer for the funds to be deposited.
Some lenders may want to make sure you are going to use the money for debt consolidation. And as a result, they may not deposit the money into your account. Or they may request proof that you have used the money to pay off the existing debts. But this is not that common.
Which banks offer debt consolidation loans?
After researching the UK market, most high-street banks offer debt consolidation loans. Namely, you can currently find debt consolidation loan products with:
- Royal Bank of Scotland
You can also get personal loans that are allowed to be used for debt consolidation at Santander. When you are searching for a debt consolidation loan from a bank, make sure to search for generic loans and check the terms as well.
What is the best bank for debt consolidation?
There is no way to say with absolute certainty which bank debt consolidation loan is the best. That’s because each debtor’s financial and personal circumstances are different.
Some debtors may require to borrow more than what is available with one lender, while others may want to spread costs out for longer than the standard maximum repayment loan term of 60 months. You need to consider all individual needs when choosing a debt consolidation loan from banks.
For most people, the APR representative rate will be the most important factor. We’ve listed some of the current rates below, which should give an indication of which bank loan is right for you. Always conduct your own up-to-date research.
What are bank consolidation loan interest rates?
The APR representative interest advertised by banks is rather similar. At the time of writing – subject to status and possible change – the lowest p.a fixed representative example can be found with TSB at 2.9%. However, the same debt consolidation loan rate is advertised at Virgin Money and Tesco.
The representative APR at Santander, HSBC, Halifax, Royal Bank of Scotland, and Natwest range between 3-3.5%. The APR example at Lloyds’ Bank is currently 3.9%.
Understanding representative APR
Banks need a fair and transparent way of advertising their loans to consumers. This allows consumers to judge if they can afford the loan and compare them to other banks and lenders. This is achieved by only advertising a representative APR rate.
The representative example shows the highest interest rate that at least 51% of people received when applying for the loan. If you are the average applicant with a credit score that resembles most of the population, this is a good indication of the rate you’ll be offered if approved. You can tailor your search to your needs using the representative example on a loan calculator. Most bank websites include a loan calculator where you can enter the amount you wish to borrow and for how long.
Always remember that this rate on the website may be better than what you will be offered, which could make it not worthwhile to consolidate your other loans, credit cards and store cards.
Will debt consolidation affect my credit score?
Applying for a loan will not affect your credit file significantly. The bank will need to complete a hard search of your file to assess if you have been able to manage your money effectively in the past and to uncover what existing credit you have not yet repaid. The only time your credit file could be damaged after consolidating existing debts together is if you fail to pay your new monthly repayment in full and on time.
Not repaying the loan could result in defaults added to your credit file and you could be taken to court and made to pay. If you ignore the loan, bailiffs could even be used.
Will I qualify for a debt consolidation loan?
A matrix of factors will determine if the bank approves your debt consolidation loan. This includes your income, the amount you want to borrow, how long you want to repay and your credit score. There is no way of saying for sure if you will be approved for a debt consolidation loan or not.
Some lenders may be able to give you a pre-application assessment before they check your credit score. This is advantageous because it prevents you from having to make multiple applications in a short period, which would negatively affect your credit file.
Debt consolidation loans and bad credit
Not everyone who wants to consolidate their credit and debts has a good credit score. You may still get approval for one of these loans with a poor credit history. You may not be able to use the big banks and might have to consider smaller or online lenders with less appealing rates and terms.
The debt consolidation loans you’re offered are likely to have a much higher interest rate than the representative APR example. If this is the case, you’ll need to reassess if the loan is worth taking out. Even though it will still lump your existing debts together, it could make them more expensive.
Alternatives to debt consolidation loans
If you haven’t managed to secure a loan or get one with the interest rate needed to make it worthwhile, there are always other ways to get out of debt. A Debt Management Plan is another consolidation strategy and it doesn’t involve further credit checks.
Or you could benefit from other debt solutions, such as a Debt Relief Order (DRO) or an Individual Voluntary Arrangement (IVA). The former can write off all your debt in one year, and the latter is for people with a large disposable income who also wish to write off some debt in time.
Debt consolidation loans help
If you’ve still got questions about putting all your debt together and your specific situation, don’t hesitate to contact a UK debt charity. We have put together a debt charity guide to help you pick the support you need.
And discover more guides on this topic by searching the MoneyNerd website. We’ve covered this debt mitigation strategy in depth to give you quick and clear answers from all angles.