Quick guide to debt consolidation loans
Having launched our platform more than two years ago, we’ve observed some interesting trends among our customers. One of the more intriguing shifts we’ve noted among our borrowers has been an increase in the percentage of those opting to use a Lending Works loan to consolidate their debt. In fact, more than 30% of the loans we now approve are for debt consolidation purposes.
Debt consolidation loans are something we often champion, as it is indicative of consumers taking charge of their finances, and making sensible decisions in order to accelerate their quest to become debt free. So what exactly does it all entail? And when is it an appropriate action to take?
Understanding debt consolidation loans
The idea behind consolidating debt is very simple. Rather than juggling a variety of obligations such as credit cards, overdrafts and other high-interest debts, it makes practical sense to gazump the whole lot with a solitary, low-cost loan to pay them all off.
On one hand, you’re saving yourself an enormous amount of hassle in terms of convenience, given that you’ll no longer be worrying about multiple debts, with differing APRs, monthly repayment dates and repayment amounts. But more importantly, by leaving yourself with a single loan with an APR lower than the collective of your previous debt(s), you’re potentially saving a fortune in interest, and therefore reducing your overall liabilities.
Debt consolidation and credit cards
The most common type of debt our customers look to consolidate is that of their credit card; which is why these type of loans are sometimes referred to as ‘credit card refinancing loans’. And it makes sense, especially when you consider that the Representative APR on credit card purchases in the UK (as stated in the UK Cards Association September 2015 Report) is 17.9%. At Lending Works the representative APR on a £5,000 loan over three years is currently just 6.4%.
What’s more, one of the big killers for those with large credit card balances is making only the minimum repayment amount each month. Credit card providers often encourage this, with short-term 0% APR offers and/or setting very small repayment minimums. It can thus deflect a borrower’s focus away from paying off the capital balance as quickly as possible in favour of spending their money on other things.
This, in turn, leaves them stuck in this cycle of debt for longer, paying more and more in interest, and ultimately filling the pockets of credit card companies while leaving a big hole in their own. A personal loan provider, on the other hand, would generally offer a robust monthly amount devoid of such temptations, ensuring that you pay off your debt quicker and save a lot more in interest in the long run as a result.
Are there any risks with debt consolidation?
If, after consolidating your debt, you are left paying less in overall fees and interest, then, on the face of it, there should be no risks or drawbacks to your decision. However, there are certainly some questions you should ask of yourself - or any lenders you may be considering - before deciding if debt consolidation loans are for you:
- Is this just a short-term fix? Have minimum repayments been all you could afford, or will you be able to meet the repayments of the new debt consolidation loan?
- If the repayment amounts on the new loan are lower, is this because you’re putting yourself in debt for longer than with your previously existing debt(s)? If so, will you be paying more interest over time as a result?
- What fees and charges are involved with your new loan? Will you be penalised for late payments, or early settlements?
- Is your credit score optimised? This is the main determinant of what your APR will be for a debt consolidation loan, so it may be worth taking some steps to improve your credit rating before applying for it
Applying for your loan
If, having factored in the above, you decide consolidation is the way to go, then good on you for taking proactive steps to save yourself money! The good news is that applying for this type of loan is usually very straightforward. At Lending Works, for example, it is as simple as getting an online personalised loan quote, taking two minutes to complete the application, and then waiting one working day for a decision. It is also advisable to read the fine print and ask all the questions that need to be asked in order to ensure that you have a loan that you fully understand, and with a repayment structure you are comfortable with.
And, most importantly, keep up the positive momentum. After all, you’ve just made a responsible decision to reduce your overall debt. With an ostensibly ‘clean slate’, it may be tempting to now up your spending. Make sure you avoid these kinds of temptations though, and rather prioritise your remaining debt. This is the ticket you’ve given yourself to a debt-free life. Be sure to stay the course!
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
Related articles
As a platform, we take great pride in all that we've achieved since opening our doors for business nearly six years ago. We’ve
Since opening our doors back in 2014, we’ve always prided ourselves on living and breathing two key principles at Lending Works: innovation, and putting the customer first in everything we do.
With the retail sector enduring its fair share of challenges, companies are looking at new ways to attract customers, and drive conversion. In an overcrowded, dog-eat-dog marketplace, with behemoths such as Amazon flexing their muscle, it’s easier said than done.
On 4 June 2019, the Financial Conduct Authority (FCA) released its new regulatory framework for peer-to-peer lending (P2P); a Policy Statement known as PS19/14. As you might imagine, it's a document which, following a three-month consultation, is a hefty read of no fewer than 102 pages.
When it comes to investing, there are numerous questions that need to be asked, and lots of things which need to be properly understood before committing your hard-earned money
Featured
In a difficult climate, customer acquisition and lead generation present stern challenges for UK retailers, and a great deal of marketing spend invariably gets directed towards getting feet through the door.
There is a variety of literature and research illustrating the importance of building brand loyalty, albeit with some degree of variance.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The idea of peer-to-peer (P2P) lending is a simple one; you lend money to those who wish to borrow, with a view to receiving a great return for doing so.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Most popular
Last week, the Office for National Statistics surprised economists by announcing that the Consumer Price Index (CPI) had sunk to 1.3 per cent for December – a full 20 basis points lower than City expectations, and also the November equivalent.
January tends to be a comedown following the Christmas festivities, and, from a personal finance perspective, a time for many Britons to lick their wounds. In particular, for those who’ve over-extended their credit card, it may feel like the walls have started to close in.
A new year, and indeed a new decade has dawned. Reflecting on 2019, what seemed to have got lost in the noise and political hysteria was the fact that the UK economy actually held up remarkably well.
As the good times rolled in the mid-2000s, only a precious few sounded the alarm as lending became increasingly reckless. Northern Rock's infamous 'Together' 125 per cent mortgage epitomised the rush for high loan-to-value (LTV) deals at a time when it was thought that house prices would just keep going up forever.
For those with an eye on the economy, 'GDP day' is always one to mark off in the calendar each month. And it's been a hot topic for the UK in 2019, with the latest update showing zero growth for the period from August to October.
One of the perceived strengths of the auto-enrolment pension scheme is its simplicity – indeed, it is actually a greater effort for an employee to opt-out of a workplace pension than it is to be enrolled into one. No further actions are required, and the retirement fund grows as the months and years pass by.
Recent
The Lending Works Shield does not give you a right to a payment so you may not receive a pay-out even if you suffer loss. The Lending Works Trustee has absolute discretion as to the amount that may be paid, including making no payment at all. Therefore, investors should not rely on possible pay-outs from the Lending Works Shield when considering whether or how much to invest. For more information click here.