Debt Consolidation - Can I Get A Consolidation Loan?

Published: 14 November 2008

The average British household is in debt to the tune of nearly £10,000, excluding mortgage debts so it is easy to see why many consumers face the problem of juggling repayments on credit cards, personal loans, etc., if not on a daily, then certainly on a monthly basis. Furthermore, making the "minimum" repayment where possible each month normally serves only to pay off the interest accrued on the debt so that the debt itself never becomes any smaller. One immediate solution to this perpetual problem however may be a "consolidation" or "debt consolidation" loan. Essentially, a consolidation loan is a loan taken out to repay all existing borrowing. It does not reduce the total amount of money that you pay back, but it does allow all the money that you owe to be repaid with a single affordable monthly repayment. A consolidation loan may allow you to reduce your monthly outgoings by spreading the cost of repayment over a longer period, reduce the rate of interest that you pay and free you from harassment by your creditors. A consolidation loan is nevertheless borrowing and needs to be used effectively, that is for the purpose which it was originally intended, if you are to decrease rather than increase your level of debt.

Consolidation Loan Eligibility

Standard eligibility criteria for a consolidation loan in the United Kingdom include; that you should be a resident of the country, 18 years of age or older and of course of sound mind. You should also typically be employed. This is either by an employer or self-employed, or have some other source of income that can be used to service a consolidation loan. Above and beyond these basic criteria which you must satisfy, you should also obtain exact settlement figures for your existing debts so that you know exactly how much you need to borrow. This may seem obvious, but try not to be tempted by incentives such as a favourable APR ("Annual Percentage Rate") into borrowing more than you actually need to repay your debts. Remember that a consolidation loan is for consolidation, not luxuries and needs to be repaid with interest.

A bank, building society or other lending institution bases its decision on your eligibility for a consolidation loan on your monthly income and outgoings. This may require evidence by production of recent payslips, tax returns, bank statements, etc., to confirm your ability to make repayments. Lenders will also refer to your credit history or credit report held with credit reference agencies to determine your suitability for a consolidation loan based on your past performance with regard to credit. It is important to be honest in all respects with your chosen lender. Often a lender will take details of your creditors and the amounts of your debts and pay them off on your behalf before passing the remaining balance, if any, to you.

If you already heavily indebted or your credit rating is below average – perhaps as the result of previous credit problems, such as arrears, or defaults – you may find that the APR that you are offered is less competitive, and amounts, and repayment terms, are limited, when compared to those offered to borrowers with average, or better, credit ratings. You may also find that special conditions – such as the requirement for a co-signor, or guarantor, for your consolidation loan agreement – may be imposed.

If you are a homeowner, you may also be offered only a "secured" loan – that is, a loan secured on the equity in your home – rather than a choice of a secured, or unsecured, loan. Lenders work on the principle of perceived risk, and if your home is at risk if you do not keep up the repayments on a consolidation loan secured against it, you are considered a lower risk – in terms of defaulting on your loan – than if you offer no security at all. This does, of course, also increase your responsibility as a borrower, so a secured loan is not something that you should consider unless you can be absolutely certain of keeping up the repayments.

Unsecured consolidation loans are, of course, available, but in the absence of security – or "collateral", as it is sometimes known – from the equity in your home, or other assets, they usually involve more stringent eligibility criteria. You will typically require a history of keeping up with repayments in a timely fashion, and an unblemished credit report, in order to obtain an unsecured consolidation loan.

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