Is a Debt Consolidation Loan a Financial Reset or Just a Payment Shift?
Taking control of multiple debts can be a major reason for financial stress. When you have personal loans, credit cards, overdrafts or any such financial commitment, it means you need to manage varied interest rates, payment dates, and charges. Therefore, monitoring all these repayments becomes tricky and costly.
Nevertheless, when there is a problem, a solution also exists. We are talking about looking for a loan to consolidate debt, like those mentioned above.
A debt consolidation loan can be a concrete solution. Now, you can simplify your finances by reducing the monthly payments by merging debts into one loan.
However, you may still have a question in your mind: Is a debt consolidation loan a financial reset or just a payment shift?
A consolidation loan can make multiple repayments easier to handle. Still, it does not automatically clear the entire financial problem. Consequently, you need to understand how debt consolidation loans work.
Knowing these things is good, but it becomes mandatory when you are going to apply for a debt consolidation loan.
What to define as a debt consolidation loan?
A debt consolidation loan is a financial process where you can merge all your debts into one single loan. It can replace credit cards, overdrafts, or personal loans.
After merging debts, you will have one monthly repayment in place of several payments. It makes stress-free for you to manage your household budget.
The loan often comes with fixed interest rates. Let us take an example:
| Before Consolidation | After Consolidation
|
| 3 Credit Cards | 1 Loan Payment
|
| 3 Due Dates | 1 Monthly Payment
|
| Different interest rates | Single interest rate
|
Why do you need debt consolidation?
People opt for a consolidation loan to simplify their finances for many reasons. Here are a few of them:
- Lower monthly repayments: Since your debts have converted into one loan, you will have a lower monthly instalment to pay. Therefore, you can better plan your regular expenses.
- Improve cash flow: Multiple debts can put a hurdle in your regular cash flow. Now with debt consolidation, you are paying one instalment and can manage the remaining salary on the household costs.
- Lower interest rates: One loan will have one interest rate. It is better than having multiple interest rates to pay. Low-cost debt consolidation loans will bring financial peace of mind.
- Streamlined budgeting: This loan allows you to simplify your regular budget with one loan to manage and a single interest rate.
Debt Consolidation Loan: Financial Reset or Payment Shift?
Different loan experts have different views on loans for debt consolidation. Some of them reflect that these are perfect for a financial reset. On the other hand, others believe these are the payment shifts.
Let’s discuss these aspects one by one:
When debt consolidation is a financial reset
A consolidation loan has the capability to improve your finances if:
- You compare the options before applying and are able to secure a lower interest rate;
- You are not adding any new debts;
- You follow an organised repayment plan to ensure no payments will get missed.
Let us understand better with an example:
| Financial Situation | Expected APR | Outcome
|
| £10,000 credit card debt | 22% APR | Heavy Repayments
|
| Consolidation Loan | 9% APR | Lower interest rate, and instant payout
|
When a debt consolidation loan is only a payment shift
Sometimes, taking such a specialised loan only transfers the debt but does not solve the financial problem completely. Here are the reasons why:
- Taking another loan extends the repayment terms, which increases the total interest rate;
- You may feel comfortable with merging debts, but that tempts you to continue using credit cards;
- Don’t compare the loans; it may lead you to costly loan deals. With high fees or APRs, you can’t save too much.
Clearing this with an example:
| Financial Situation
|
Risk |
| Longer repayment terms | More interest to pay in total
|
| Using credit cards still | An increase in debt again
|
Now, the above points are enough for you to assume a debt consolidation loan with either of these perceptions. We will now make it easier for you by highlighting the possible advantages and disadvantages of a debt consolidation loan.
Pros and Cons of a Debt Consolidation Loan
Let us do a comparative analysis of these loans:
Advantages:
- Single monthly payment easing your budget despite regular and irregular expenses
- Possibility of lower interest rate compared to those of multiple loans;
- You can better manage your finances when everything seems predictable;
- It is expected that you can manage the loan, and therefore, it will improve your credit scores.
Disadvantages
- This loan is all about going for another loan to eliminate previous ones;
- There is a possibility of extra fees or charges, such as early repayment and late payment;
- A risk of over-borrowing is always there;
- Most of the time, loan approval depends upon the individual’s credit profile.
What are the steps to consolidate debt?
Given below are the steps that you can follow to apply for a consolidation loan:
- Calculate your total remaining debts
- Check your credit score with the help of an agency
- Compare lenders with the help of a broker
- Apply for a debt consolidation loan at the lender’s website
- Get approval, receive funds and pay off your debts
Pursue the repayment plan and pay each loan instalment on time.
Why compare loans through a broker?
Many people approach a loan broker in Ireland rather than applying directly. They want to minimise the risk of getting trapped in marketing jargon.
The Irish marketplace definitely has a few reliable brokers like Givemyloan. They have created a digital platform to:
- Compare multiple Irish private money lenders
- Ensure high approval chances by suggesting only suitable loans
- Bring a fast funding decision
- Customise loan options for picking the best of them
If you also want to compare the best deals available on a debt consolidation loan, click here to get an instant list of reliable lenders.
Frequently Asked Questions
Can I get a loan to consolidate debts despite bad credit?
Yes, some lenders in Ireland consider applications for a debt consolidation loan despite a poor credit score. Yet, higher interest rates you need to pay.
Does a debt consolidation loan upset my credit score?
There will be no disturbance to your credit score at the initial stage of your application. In fact, you can improve it by following the repayment plan. We suggest you be wary of the deals advertised as a ‘debt consolidation loan with no credit check’.
How soon can I receive funds?
Online lenders usually release funds within 24 hours if approved. Sometimes, it may be late, but it is just in case.
In a nutshell
A debt consolidation loan can be a financial reset if it is useful with lower loan costs and structured repayment plans. On the other hand, if there is no difference in your spending, it may just be a payment shift to eliminate the previous debts.
Ava is Editor-in-Chief at Givemyloan and is known for her deep and practical approach to modern personal finance. She has written several articles covering topics like personal loans, business loans, etc. Coming from an economics and finance background, she has worked behind the scenes to curate informative content to help borrowers identify the right loan option.
Ava’s role at Givemyloan lets her combine her interest in writing with her curiosity to explore the finance realm. She likes to be updated about what is happening in the lending industry. Most importantly, she tries to instil her knowledge in her writing in the best way possible.
She is passionate about helping borrowers look beyond the general features of a loan, i.e. about the fees and other intricate details. When she is not writing, she likes to read contemporary fiction. She is on a mission to help educate people looking for loans so that they take the right route.
