Finding the best loan for debt consolidation
How do refinancing loans work?
Refinancing loans give the borrower the means to pay off most or all of their existing debts at once. The immediate appeal is that once those debts are cleared, we only have to make one monthly repayment instead of several; we'll also have just one APR and one repayment period to keep track of, which can make budgeting longer term simpler.
There are two main kinds of refinancing loan: secured loans, and those offered on unsecured terms. All the loans we feature above are unsecured, as these are more widely available and far less risky than the alternative: securing our borrowing against our existing assets. For this reason, secured refinancing loans – often referred to as debt consolidation loans – tend to be reserved for homeowners, those who owe very large amounts, or those with very poor credit histories.
Why would I want to take out another loan?
The main reason unsecured consolidation loans are attractive is that they give us a fresh chance to pay off our existing debts. While the general rule with borrowing is that the sooner we can repay it the cheaper it will be, those who need to bring down their monthly outgoings may find that a refinancing loan allows them to set their repayments at a more sustainable level, even if it does mean they owe money for a little longer.
The other reason they can appeal is that depending on the kind of debts we have, it can be cheaper to combine them into one loan than continue to pay each one individually. The kind of representative APRs quoted above are often far better than the standard interest rates charged on many credit cards, for example – so if we transferred the debt and continued to make the same monthly payments we'd clear it sooner.
When is a consolidation loan the right choice?
The best reason to get a consolidation loan is that it will cost us less than continuing with our existing repayment plans. Depending on our circumstances, that may mean paying less overall, or paying less per month, but the ideal is to find a loan that enables us to do both.
That means finding out about any early settlement fees for paying off current loans; overpayments are allowed without penalty up to a certain point, but clearing a loan in full ahead of time can often incur charges. Particularly when we have several debts to clear, early repayment fees can mean borrowing more than we might first think we need.
Consolidation loans can be a good choice for those who can't shift their borrowing to a low- or no-interest balance transfer credit card, as they tend to charge lower rates and fees than standard credit cards, and there's no penalty for moving the debt as there can be with a standard loan. This is a particularly good option for those who prefer the discipline of making fixed monthly payments over a fixed term to the temptation of an open line of credit – in these cases, make sure to close the card accounts once they've been paid off.
When are refinancing loans not a good option?
Refinancing loans are not a good deal if we already have access to cheap or free borrowing, such as a credit card with a good length 0% balance transfer deal, or if we can afford to make even small overpayments on our existing loans, as this can significantly reduce what we owe without incurring & fees. We explain more in this guide.
Those looking at refinancing in order to pay less each month should also be wary of ending up with a longer repayment period, as this can often cost far more overall. And while getting a loan means borrowing more to begin with, the idea is to help get us out of debt - so anyone who has already had a refinancing loan, or who needs to keep using the credit cards they're paying off, may want to consider asking for help to break the cycle.
How much can I borrow?
The refinancing loans listed above are all unsecured. The maximum loans the providers will offer are therefore smaller than those available with a secured loan – but they don't require us to put up our home or other assets as security in case we fail to keep up repayments. While many providers offer quite generous amounts, the value of the loan we'll be able to get, and the rate we're quoted will depend on our circumstances.
As the point of a refinancing loan is to reduce how much we owe, we should apply only for what we need to cover our existing debts. This may be more than we first think however, as while overpaying existing loans is allowed up to a point, clearing them completely ahead of time may be subject to early settlement fees. Borrowers will need to find out how much these charges are and factor them in to their application.
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