What is a debt consolidation company and should you bother using one? We’ll explain what they are, discuss some current options and explain if they’re worth it. Read on if you’re considering using a debt management company to help you combine debts.
What is debt consolidation?
Debt consolidation is the technical term for moving all your debts into one place. If you have multiple existing debts with different lenders, you could take out more credit to pay all of them off, so you now have one bigger debt as opposed to lots of smaller debts. For example, you could take out new credit that is large enough to clear any payday loans and credit cards.
It enables individuals to streamline their unsecured debt and make managing their budget and monthly payments easier, which can also contribute to preventing further debts from materialising.
But it’s essential to only take out a new loan to pay off existing credit with an equal or improved interest rate in comparison to the interest rates being paid across the existing debts. It is only considered worthwhile if you can save money by reducing the interest you pay.
Debt consolidation loans
If you want to consolidate debt, you can use a debt consolidation loan. These debt consolidation loans are a type of unsecured personal loan that is specifically used to pay off other debts.
You may also be able to combine debts into one monthly payment by using generic personal loans that are not specifically marketed for this purpose – but always check before applying!
Where can I get a debt consolidation loan?
Debt consolidation loans are offered by high-street banks and online lenders. Applications are generally lodged online with a decision almost instantly. You should only ever apply for a debt consolidation loan from a lender that is authorised and regulated by the Financial Conduct Authority.
You could also access a debt consolidation loan through a debt management company, as explained further below.
How much do you pay for debt consolidation?
How much you pay for debt consolidation depends on the method you use. If you get a consolidation loan independently by applying yourself, you’ll typically only have to pay the interest on the new loan.
If you have bad credit the rate you’re offered may be higher than advertised, which could even make debt consolidation not worth it for you. There may be early repayment charges for paying off your loan or credit card debt early, and you should check your loans agreement for the details. It’s important to do the maths to make sure you’re improving your situation and not making it worse.
There is also the option of paying for services that assist you in debt consolidation. These are known as debt consolidation or debt management companies…
What is a debt consolidation company?
A debt consolidation company is a commercial business with finance professionals. They will offer to assess your situation and help you apply for consolidation loans. The company may provide debt consolidation loans directly.
But remember they are a commercial business and do not offer this service for free. You will have to pay costs, possibly including initial fees and ongoing monthly charges.
How do debt consolidation companies work?
These businesses are typically partnered with consolidation loan providers and receive a commission for their referral if the loan is approved. On top of this, they will charge the debtor for their work. Applying for a loan with or through a debt management company like this should still involve a credit score check. If your credit history is poor, you can still be rejected for the loan.
Is it smart to use a debt consolidation company?
Using a debt management company to assess your situation and find a debt consolidation loan can be beneficial if you need help and are willing to pay the fees. But similar services are free from UK debt advice charities at no cost. They will assess your situation and explain your options. They won’t necessarily help you find a debt consolidation loan like a debt management company might, but they’ll provide you with enough information so you can make decisions with confidence.
What debt consolidation companies are the best?
The best companies to help you consolidate will offer free consultations without applying pressure for you to proceed. And they’ll search the whole market rather than only using select partners. If they only work with certain lenders, you might be missing out on the best interest rates.
It can be extremely difficult to work out how one of these companies work and if they really do have your best interest in mind. Or if they just want to make money from you. If you do use one of these businesses, do as much research as possible and search through online reviews and forums for details.
We have reviewed scores of these commercial companies right here at Money Nerd. Search for the companies you’re considering using on our website to see what our researchers found out.
Alternatively, choose free debt advice from a charity or credit counselling services.
Who offers debt consolidation loans?
If you want to avoid using one of these companies, you should search your options online independently. You can find these types of loans with banks and lenders like:
- Virgin Money
- The UK Post Office
- JN Bank
And many more!
How to compare loans?
The APR representative can be used as a guideline to compare loans with each lender. But this can be time-consuming. Alternatively, you can use websites that offer a loan comparison service.
Do consolidation loans hurt your credit score?
The only time one of these loans will harm your credit score is if you do not meet repayments on time and in full – or if you failed to repay the full loan amount.
Applying for a debt consolidation loan will involve a hard search on your credit history. Your credit score will not be significantly affected by these searches if they are spread out, i.e, you haven’t applied for a lot over a short period.
Other ways to consolidate debts
There are other ways to put your debt together into single monthly repayments. You can consolidate credit cards only with a special balance transfer credit card, or homeowners can remortgage to release home equity and use the funds to pay off debts. As this would be a secured loan the risks are greater and you’ll require professional mortgage advice.
Another option, which doesn’t really consolidate but does mean you’ll only have to pay once every month is a Debt Management Plan. A debt management company can also help you arrange one of these with creditors for a fee. Or you can get one organised yourself or through a debt charity at no cost.
Debt management companies argue that because you pay them for their service, they work for you to get the best deal. But this isn’t always true or guaranteed.
Is consolidating debt worth it?
It may or may not be a good idea for you to put your debts together in this way. It’s only a beneficial strategy if you can find a loan with lower repayments and/or reduce the interest. Remember that the representative APR rate may not be what you’re offered if approved.
The good news is that even if you cannot find the loan you need, there are other debt solutions available, including for people with poor credit. The best way to get clarity on the situation for free is to speak with a debt advice charity first.
For more information on consolidating your debts and debt solutions, search the MoneyNerd website. We have an arsenal of guides written to help you become debt-free.