Debt Consolidation Loan - Good Idea? + Should I pay off soon to be paid off loan?

sourcrates

Saladin95 said:

sourcrates said:

Another massive NO from me, you get out of debt by using debt solutions, not by borrowing more money, however much cheaper your monthly payment "would" be, its going to cost more in the long run, and the temptation to re-use lines of consolidated credit will always be biting at your heels.

These type of loans have a very high failure rate, most end up consolidating more than once, some do it twice, three times or more, until they finally realise, you can`t borrow your way out of debt.

It always makes sense until the wheels fall off.

I like the way you put that - 'you get out of debt by using debt solutions, not by borrowing more money'! I'm going to go back to the drawing board, look at the SOA option, and perhaps take Brie's suggestion to reallocating the monthly amount from Loan 1 once it's up to the most expensive credit line, and so on. Thank you for taking the time to comment and give sage words I need to hear

You are very welcome, we do see this an awful lot on these boards, and a consolidation loan may seem like a quick and easy fix, but we also see the results of consolidating time and time again, when it all goes wrong, and so we want you to avoid that scenario at all costs.

Good luck in getting debt free, it can be done.

Stuart_W

Just to add, check that your very account doesn't have a pending interest rate rise - I believe quite a few, if not nearly all, are rising to 54.9% APR in September. There should either be an email somewhere or details with your July statement if it affects you. Probably makes it top of the pile to clear, if it wasn't already. Don't forget you can "pay" a very account with a credit card (and it counts as a purchase, not a cash-like transaction) so it could be a quick one to shift for the sort term anyway, whilst working out other decisions.

Combenew

I fully understand and endorse the don't do it response. What I've noticed on the forum though is that it's generally acceptable to balance transfer from card to card to save interest. Surely this is another form of consolidation.
My view is that if the OP is switched on enough to close each credit line then it may be a good move.

Brie

Combenew said:

I fully understand and endorse the don't do it response. What I've noticed on the forum though is that it's generally acceptable to balance transfer from card to card to save interest. Surely this is another form of consolidation.
My view is that if the OP is switched on enough to close each credit line then it may be a good move.

I get that and I guess it does seem the same in some way.  But if you already have a card (& the available credit) and can move the debt to someplace with 0% interest that is an improvement.  And then the card that is cleared can either be closed or the credit reduced.  Doing BTs is never a good long term solution and those that continually do that (my hand is up!) haven't dealt with the debt.  It used to be a good way to actually earn money when there were no fees and - as I did - I could then have more money being paid on my mortgage.  But the wheels came off that wagon a few years back and caught out a lot of people.  So yes, better to have no debt, but if you have debt better to have it at 0%.

Which brings me back to the OP  - yes if you ask for no interest or an unofficial breathing space that will be reflected on your credit history.  But my opinion is that you are already in a bit of a jam so wonder if it will really make that much of a difference in the long run.  A couple of months showing as yellow on Experian or otherwise indicating a payment arrangement for a short period quickly fades and becomes less relevant as time goes by.  

DisabledDan

Saladin95 said:

Hi,

I'm considering a debt consolidation loan to pay off all my debts and end up debt free for the first time in my adult life. See below for my debts and relevant details:

Debt Type	Amount Owed	Monthly Repayment	Final Payment Due
Loan 1	£1624	£232	February 2025
Loan 2	£6000	£219	July 2027
Credit Card 1	£4400	£110
Credit Card 2	£1000	£35
Credit Card 3	£1000	£30
Catalogue	£2000	£90
Total	£16,000	£716

I've been pre-approved for a £16,000 loan at 13.8% APR (high, I know but considering all my debt I guess fair), paying back a total of £19,407. I've opted for a 3 year term at a monthly payment of £540 a month. This would have two obvious benefits: 

1. The capital is actually repaid and I'm completely debt free by 2028.
2. Monthly payments drop from £716 to £540, giving me breathing space of an extra £176 a month

Now this all makes sense to me. But my slight hesitation is Loan 1, which ends in February 2025 - it feels daft to include it in this? I could alternatively go for a £14,400 loan at 13.3% APR, bringing down the monthly payments to £482. So what this would mean is:

1. Until February 2025 my monthly payments will be £714
2. From March 2025 my monthly payments will be £482

This option would leave me £234 a month better off. 

Thoughts on what I should do? Or is this a no brainer and I should go for Option 2?

The no brainer from me is ABSOLUTELY NOT! 

I would steer clear of this type of loan at all costs, there are better ways, but to advise you properly an SOA is needed to put the debt into context, work out what you can afford and help you save money on what you are spending it on.

Most people I know who took this kind of loan ended up in debt again and also had to service this high interest loan.  It is the trap the lenders try to get you to fall into. 

You have not listed the interest rates for each debt which is by far the most important consideration.

It looks like you just took out LOAN2 so that will likely have a lousy redemption figure for at least a year.

Currently you you are probably looking at paying this in up to 40 months, but if you got it interest free the idea would be to increase monthly payment to clear it sooner. If you paid the same £716 you are paying now on a 0% card it would take 23 months to clear it.

There is no judgement here, but the profile suggests either a gambling problem or perhaps an impulse shopping issue.

When you have either of these the consolidation loan is attractive to you only because on the face of it you free up more money to gamble or spend on stuff you don't need or even want.  That is why they fail, also because you need to get to the core issue, which is living beyond your means.  The solution to that is cutting back, ideally to the bone if you want to be free of debt soon and forever.

If you are treading water because you can sort of afford it, then you should seek a 0% balance transfer (with more than one lender if required), that would allow you to throw far more at the debts, we can't say how much until we see the SOA.

If you got that loan approved then you should be eligible for balance transfer cards, you effectively pay around 3% unless you have the means to pay off in 13 months with the NatWest NO FEE card or Barclaycard No Fee

https://www.moneysavingexpert.com/credit-cards/balance-transfer-credit-cards/

If for some reason the eligibility checker says no then focus on the highest interest rate debt first putting all you can afford on the debt with the highest Interest rate, you can also shuffle debt between cards by spending in different ways and redirecting the cash it frees up.  For example if you had £2000 free credit limit on a lower interest card you buy all your food on that and use the money saved from bank to throw at the higher interest card.  There is no point throwing money at the loan unless it saves money, so you need to get the settlement figure from the loan lenders.

• Longest 0% cards
  • Tesco Bank 29 months, 3.49% fee
  • Barclaycard up to 28 months, 3.45% fee
• No-fee 0% cards
  • NatWest 13 months, NO FEE

• 0% cards for poorer credit scorers
  • Virgin Money 16 months, 3% fee
• Tool: Eligibility calculator

Tesco Bank	Longest 0% period, which all accepted will get. You'll get the full 29 months at 0% if you're accepted for this card, and if you're pre-approved in our eligibility calculator you can be certain you'll be accepted (provided you pass Tesco Bank's ID & fraud checks).
	- 29 months 0% - 3.49% fee - 24.9% rep APR	Check eligibility
		Apply*
Barclaycard	Long 0% period, but some could get less time at 0% unless pre-approved in our eligibility calculator. If you're pre-approved you'll definitely get the full 28 months at 0% (as long as you pass Barclaycard's ID & fraud checks), otherwise you could be accepted and get just 14 interest-free months.
	- Up to 28 months 0% - 3.45% fee - 24.9% rep APR	Check eligibility
		Apply*
Santander	Lower fee, long 0% card – all accepted get the full 26 months 0%. If you can clear your debt in this time it'll beat the above cards due to the lower fee. All accepted will get the full 26 months at 0%.
	- 26 months 0% - 3% fee (min £5) - 23.9% rep APR	Check eligibility
		Apply*
NatWest	Longest 0% period with NO FEE – a winner if you can repay before the 0% ends. If you repay in full within 13 months, this transfer will cost you absolutely nothing. Plus, our eligibility calculator will now tell you if you're pre-approved for a guaranteed minimum limit on this card.
	- 13 months 0% - NO FEE - 24.9% rep APR	Check eligibility (i)
The next best 0% balance transfer cards. Here are quick details of decent alternatives.
HSBC	- Up to 27 months 0% - 3.49% fee (min £5) - 24.9% rep APR	Check eligibility
		Apply*
Virgin Money	- 26mths 0% - 3.25% fee - 24.9% rep APR	Check eligibility (i)
Virgin Money	- 20mths 0% - 2% fee - 24.9% rep APR	Check eligibility (i)
Barclaycard	- Up to 12mths 0% - NO FEE - 24.9% rep APR	Check eligibility
		Apply*

Important: Balance transfer fees are a percentage of debt shifted. To get the 0% and fee, you must usually do the balance transfer within 60 or 90 days of opening. You can't balance-transfer between cards from the same bank/group.｜Representative APR (variable) after the 0% period is stated above – your balance transfer interest may be different. (i) These providers have asked us to only link to our eligibility calculator.｜See all official APR examples.

If you can't get a new 0% card, try the credit card shuffle to cut interest

If you're unable to get any of the cards above (use our eligibility calculator to check), you may still be able to slash the interest by asking for a low-rate or 0% deal on the card you already have.

If you've more than one credit card, you can then shift debt to the card which offers the lowest rate, though you'll need to factor in any one-off transfer fees.

Here's how to do it step by step:

1. List all your debts. Take stock of your current situation and note down all your existing debts, including an overdraft if you have one. Our credit card shuffle worksheet may help.
   

Andyjflet

Its a big NOOOOO from me too, your thinking is strange, perhaps its the way you worded your first sentence?

"I'm considering a debt consolidation loan to pay off all my debts and end up debt free for the first time in my adult life."

Pay off the debts you have, start with the smallest one first, everyone knows I'm a Dave Ramsey advocate, I think the 7 baby steps would really work in your scenario. By consolidating you are committing to a further long term interest on the debts you have already. You need to identify why you are perpetually in debt, sort the root cause, and then start paying it off, its not a huge amount of money.