Consolidation loan… good or bad?

violetbones

Hi all!  I’m brand spanking new here so hope I’m doing this right…

I’m hoping I could get some advice. Myself and my partner are hoping to purchase a Shared Ownership property this year, and will therefore need to apply for a mortgage. We are unsure as to when this will be yet as we haven’t found the right property.

I do have some debt, spread over a personal loan, a credit card and a small overdraft. I was recently offered a consolidation loan, which would pay off my existing loan and overdraft, as well as a large chunk of my credit card.

The APR would be lower than it is currently on my personal loan, and I would be able to pay it off in 3 years, which is the same amount of time left on my personal loan.

To me, this seems like a good idea, as it means everything will be in one payment and I can pay off a few things at once. However, my partner is concerned that this could result in us being declined a mortgage as I have taken out a new loan in the same year that I want to take out a mortgage.

Anybody have any insights to this? I feel torn now, and am just trying to clear my debt as best I can 

EssexHebridean

First things first - are you 100% clear on what the cause of your debt was in the first place, and have you dealt with the issues that have lead you to get into debt? Are you making inroads into clearing the existing debts, and if the credit card is charging you interest, have you looked into switching this to a 0% balance transfer card?  How does your credit file look generally across the CRA's? Do you have any defaults/late payments etc?  Are you still using credit?

The fact that you have an overdraft suggests two things to me - firstly that the answer to question 1 above is no. Second, that you don't currently have a budget in place for your routine expenditure. 

Rather than consolidating, I'd think about trying to make sure that your existing debt is costing you as little as possible, and learn to budget. That budget should identify how much spare money you currently have at the end of a month, and that surplus needs to go towards clearing your existing debt. 

There are a lot pf very good reasons why consolidation usually leads to people ending up in more debt than they started with - that's the reason we generally recommend against it. 

The link to the SOA template you were advised to complete can be found in my signature below. 

Sncjw

You say the Apr will be lower but thay would be the representative rate and not graunteed to get it. You could be offered more.

Also having the Consolidation loan doesn't deal with the issue and also doubles your debt. The lender will assess you on double the debt you have now. There's no garuntee that you would use the money to pay off the debt. 

Why of post a statement of affairs and we could find a better way to help you. 

Any debt you do have will be taken off the amount the mortgage lender is prepared to lend you as if you didn't have the debts.

GreenCat80

if you want to clear your debt the best thing to do is find a way to increase the amount you throw at it each month, rather than taking on more debt (I’ve been there and done it, as I’m sure most of on here have done 😬 it doesn’t work) 
If you’d like some help on the best way to pay it off, you can post your SOA on here and I’m sure you’ll get a lot of helpful suggestions good luck, you’ve got this  

enthusiasticsaver

I agree with your partner it is not a good idea and will affect affordability for a mortgage. Taking out borrowing within 6 months of the mortgage will also affect the credit scoring for the mortgage. Also to be clear a consolidation loan does  not "pay off" an overdraft, credit cards etc.  It is just moving debt from one place to another.  An overdraft is probably costing you a lot in charges/interest so you should repay that first by cutting back as far as possible and prioritising that.  Alternatively use savings as presumably you have some if you intend buying a property and then reimburse your savings as undoubtedly you are paying more in debt interest than you receive in savings unless the debt is all at 0%.  

The final thing I would add is that have you actually had an offer for a consolidation loan at a guaranteed rate?  Often you find that many people once they go through the application process are not offered the headline rate so you may think it will be cheaper but the rate you eventually get offered may not be the one advertised. 

fatbelly

The one thing I might consider is a 0% balance transfer on the credit card, possibly also clearing the overdraft if you can get the deal on a money transfer card.

0% borrowing (albeit with a small fee) would be the only thing I would consider other than using your savings pot to clear the debt. Hopefully you're getting some interest as every little helps.

https://www.moneysavingexpert.com/credit-cards/best-0-credit-cards/
https://www.moneysavingexpert.com/credit-cards/money-transfers/ *
https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/

*If you go for the Tesco card, remember there's £30 cashback available at Quidco