Considering a debt consolidation loan - need a sense-check before committing

icarus_69

Hi everyone,

I'm looking for some advice on whether it makes sense for me to take out a personal loan to consolidate my debts. I want to make sure I'm making the best financial decision and would appreciate any insights you might have.

My Current Financial Situation:

I have debts spread across a couple of overdrafts and credit cards:

1. Monzo Overdraft: £336.91 at 39% APR

2. Santander Overdraft: £1,879.11 at 39.94% APR

3. MBNA Credit Card: £1,167.67 at 34.02% APR (some balances may have 0% promotional rates)

4. Vanquis Credit Card: £262.16 at 26.52% APR (2.21% monthly)

Total Debt: £3,645.85


Here's a loan I've been advertised by Monzo:

Loan Offer from Monzo:

Loan Amount: £7,050

APR: 14.5%

Monthly Repayment: £338

Loan Term: 24 months

Total Repayment: £8,091

Total Interest: £1,041

I calculated that if I continue with my current debts and interest rates, I'd pay approximately £1,348.28 in interest per year, which amounts to about £2,696.56 over two years.

By taking the Monzo loan, I'd pay £1,041 in interest over the same period. This suggests I could save around £1,655.56 in interest over two years by consolidating my debts with the loan.

Alternatively, I have also seen (via Experian) that I have a 70% chance of being approved for a Tesco loan, which could work out at just 7.2% APR.

I'm aiming to make a responsible choice and would greatly appreciate any advice or experiences you can share.

I should have clarified here. The reason I am considering borrowing more than I owe is because I am close to the limits on my current account overdrafts.

If I only borrowed what I owe, then I will go back into my overdraft tomorrow.

I work part-time, and while I am taking steps to reduce my monthly outgoings, as well as find full-time work, this won't happen overnight. This is why I feel I need the buffer that borrowing more than I owe would give me.

CliveOfIndia

Consolidation loans are rarely a good idea, for a couple of reasons.

Firstly, unless you address the underlying cause of the debt, you're on a hiding to nothing.  Yes, you can use a loan to clear your cards/overdrafts, but unless you take stock of your situation you can all too easily find yourself spending on those cards again once they're cleared.  Before long, you've got twice the debt you started with.

Secondly, you can't assume you'll get a loan at the advertised "representative" rate - or even at all.  Since the lender can't force you to use the loan to clear your existing debt, they have to assume that the loan will be in addition to - not instead of - your existing debt.  This will be factored into their affordability/lending algorithms, and you'll very likely find the rate you're offered is much higher than the advertised representative rate.

icarus_69 said:

I work part-time, and while I am taking steps to reduce my monthly outgoings, as well as find full-time work, this won't happen overnight.

This is really where you need to be focussing your energy.  Head on over to the Debt-Free Wannabe board, fill out an SOA and let the good folk there help you.  It can often be surprising what a fresh, impartial pair of eyes can see in your budget, and very often it's possible to reduce your outgoings quite considerably.  That's a much better goal than just shifting the debt from one place to another without actually doing anything to address it.

Jami74

How much are you currently paying each month in total to the debts?

ManyWays

Unless you in the overdrafts for that amount every day of the month, the interest sounds very high but you are only paying that for some of the time. It probably isn't costing you as much as you think so it could be a big mistake to consolidate those even at a rate that appears to be lower.  

MEM62

Consolidation loans are rarely an effective solution.  You need to firstly address the cause behind the debt and then make a plan / budget for clearing it.  You will need to look at the OD's first.  In addition to being expensive they can be withdrawn with little notice.    

fatbelly

You've had really excellent advice.

Rather than committing to a 'solution' that will add £4500 to your debts you need to engineer a situation where you have more surplus income, which will probablymean taking on more work and maximising benefit income

Then you will be more attractive for 0% credit card deals, maybe a 0% overdraft, and you can really attack the debt.

The soa may show the situation is better, or worse, than you describe. Please post one

poppasmurf_bewdley

So you owe  £3,645.85 and want to take out a consolidation loan of £7,050.  Did you ever do maths at school?

saker75

I’m going to go against the grain on this. I had similar levels of debt. My savings were wiped out during covid (I was freelance but got no government support and my work dried up). I took out a credit union consolidation loan and that has been transformative. They made sure the debts were paid off, and the agreement is that if I take out further credit they’ll dramatically increase the interest- so it’s an incentive to learn to live within my means.

Nasqueron

saker75 said:

I’m going to go against the grain on this. I had similar levels of debt. My savings were wiped out during covid (I was freelance but got no government support and my work dried up). I took out a credit union consolidation loan and that has been transformative. They made sure the debts were paid off, and the agreement is that if I take out further credit they’ll dramatically increase the interest- so it’s an incentive to learn to live within my means.

Depends how they enforce the credit rule, unless they have access to your files they won't know.

There are always exceptions that prove the rule but typically people with lots of debt can't/won't address the reasons behind the debt so even if the consolidation is used correctly, they can just run the debt up again, hence why it's not recommended.

fatbelly

Credit Unions are not a great choice. Yes, they lend to peop!e with poor history but there is a reason for that history. These are often last-chance loans.

The aprs are not particularly low and they are often aggressively enforced

Unlike other loans they can attach to Universal Credit without a court order

https://england.shelter.org.uk/professional_resources/legal/benefits/universal_credit/deductions_from_universal_credit_for_debts#third-party-deductions-to-other-creditors

saker75

My consolidation loan APR is 6.7%. It’s a union based on a profession and was set up as an ethical alternative to other financial services. Yes, it’s based on trust but that’s also a key part of the profession!