There isn't a best loan for debt consolidation, in fact there are several options with pros and cons based on many different factors. If you have debts with a number of different creditors, it can be difficult to keep track of what you owe and when you need to make your repayments. Choosing to consolidate those debts could help to simplify your repayments and maybe even save you money.
What is debt consolidation?
Debt consolidation simply means merging your existing debt from several accounts – be that credit cards, loans or overdrafts – into one place. To do this, you’ll need to take out a new loan to pay off all your existing credit commitments and then make your new repayments to the new provider. Because you’ll only have one lender to deal with and you’ll only need to make one repayment each month (rather than several), managing your debt could be far easier.
What’s more, if the new loan you’ve taken out has a lower interest rate, you could potentially save money, that might help you pay off your debt faster.
Consolidating debt may not be the best solution for everyone, however, so it’s important to research your options carefully to make sure it’s the right choice for you. It won’t be a good idea if you’ll end up paying more overall due to a higher interest rate or longer repayment term, for example, or if you can’t afford the new loan repayments.
How can I consolidate debt?
If the debt you want to consolidate is only on credit cards, you could shift that debt to a 0% balance transfer credit card. Doing so means you won’t pay any interest on your balance for a number of months, giving you time to tackle your debt head on. You’ll usually need to pay a balance transfer fee of around 1% to 3% and remember that once the 0% deal ends, interest will kick in.
However, if your debt is more substantial and it’s spread across multiple types of credit account, you won’t be able to use a credit card and a debt consolidation loan could be a better choice.
What are the best loans for consolidating debt?
There are two main types of debt consolidation loan – an unsecured loan and a secured loan.
Both options enable you to borrow a lump sum which you then repay in fixed monthly instalments over a set term, but there are some key differences between the two.
Unsecured loans
An unsecured loan will likely be more suitable for those with smaller amounts of debt to repay. It typically lets you borrow a sum of up to around £25,000 to be repaid over a term usually between one and seven years. Interest rates can be pretty competitive, particularly for sums of between £7,500 to £15,000. There’s no need to secure the amount borrowed against an asset, but should you wish to repay your loan early, there’s usually a high fee to pay.
Homeowner loans
A secured loan lets you borrow a much larger sum of money – usually upwards of £25,000 – and you can repay it over a much longer term. Secured loans can be easier to get accepted for compared to unsecured loans, and interest rates tend to be lower.
Selina offers homeowner loans between £10k and £500k with terms from 5 to 30 years. If you need all your funds on day one and want to know where you stand in terms of repayments for the whole duration of your term, this could be the right option for you.
Home Equity Lines of Credit (HELOCs)
A HELOC is also secured against your property but the funds are received as a line of credit. This means that rather than borrowing a lump sum, as you would with a homeowner loan, you can tap into this line of credit as and when you need to, up to the agreed limit.
You’ll have a flexible period, during which you can draw on your funds, repay, and redraw. You’ll need to pay back the amount you’ve borrowed, plus interest, during the repayment period.
One of the biggest advantages of using a HELOC is the flexibility it offers. You can use the amount drawn to pay off your existing debts and you’ll only pay interest on the amount you borrow. Should you need to borrow more than you originally expected, you can draw additional funds (as long as this is within your credit limit), rather than take out a brand-new loan.
The Selina HELOC offers funds from £25k up to £250k, depending on the equity you’ve built up in your home. If you are thinking of using the Selina HELOC to consolidate existing loans, you should be aware that you may be extending the term of your debt and increasing the total amount of interest you repay.
Will I qualify for a debt consolidation loan?
To get accepted for the competitive interest rates with any type of loan you will need an excellent credit history. If your credit score is poor, your loan application could be rejected outright, or you might be offered a lower borrowing amount at a higher rate of interest.
To be eligible for a Homeowner Loan or a HELOC from Selina, you will need to be a homeowner and be on the title deeds of the property. In addition, you need to be a UK resident, meet minimum income requirements and have a good credit history.
The drawback is that you’ll need to secure the amount you borrow against an asset – usually your home. This means that the lender has the right to take possession of the asset if you are unable to keep up with your loan repayments. For this reason, secured loans need to be considered with care, and it’s best to seek professional advice before applying for one.
Consolidating unsecured debts with secured lending may increase the amount repaid overall. Your home may be repossessed if you do not keep up repayments.
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