What is a debt consolidation loan?
A debt consolidation loan is a type of personal loan that allows you to roll several different debts, like credit card balances, store cards or even other personal loans, into one place, so you only have to deal with a single repayment.
That means you only have to remember one due date. Plus, debt consolidation loans can have other benefits like getting you a lower interest rate than on some other products or meaning you only have to pay one annual fee - or no annual fee.
Can a debt consolidation loan hurt your credit score?
Like any other kind of lending, a debt consolidation loan could hurt your credit score if you aren’t responsible with meeting your repayments. However, if you’re responsible, it doesn’t have to affect your credit negatively.
If you apply for a debt consolidation loan, it will appear on your credit history as an inquiry and, if you’re successful, as a new source of credit available to you. This can be good or bad - it lowers your credit utilisation, which is usually a good thing, but it also raises the amount of total credit available to you, which isn’t always as positive.
Paying off lingering debts (and closing old credit accounts if you no longer use them) is a good thing and will usually a positive move not only for your credit history but for your finances in general.
How do debt consolidation loans work?
As the name suggests, a debt consolidation loan works by rolling debts from multiple sources, for instance car loan and credit card, into a single personal loan.
Apart from the benefit of saying goodbye to multiple payments as you'll only have one monthly repayment, you'll also get the chance to reduce the interest rates you're paying, particularly if you're consolidating high rate credit or store cards into the new loan.