Debt consolidation loan?

LeastofLeicester · 2022-04-05T11:52:24+00:00

I just want to gauge whether this is a good idea or not. Between me and DH we have about 8k in debt split over credit cards/old debt/latest tax bill. We can just about cover all bills and repayments but have pretty much £0 disposable income after. I'm looking into taking out a debt consolidation loan to pay it all off, and therefore reducing our debt/cc costs from £870 a month to £340 a month. That should then give us a bit of a breather and start putting bits in savings so we can avoid getting stuck back in the credit card cycle. Loan rate is 3.5ish whereas cc rates are a hell of a lot higher so we'll pay less overall too. Are there any down sides I've overlooked? Tia xxx

Haribosweets · 06/04/2022 06:37

My husband and I had a lot of debt. Between us was over 20k but separate over drafts, credit cards etc. He went through a scheme (can't remember what it's called) whereby they contacted all his creditors and agreed a monthly repayment a lot cheaper. He then paid this scheme who paid the creditors the agreed amount. He was debt free last year and took 10 years. I decided to get a bank loan but a few years after him as I was never in the green. I was £4000 over drawn each month as well as paying credit cards interest I wasn't getting anywhere. I figured it all out got a loan for £12000 over 6 years with monthly repayments of approx £220. The downside was with interest I am paying approx £16000 so 4k more than my debts. I'm not sure why I did this and not gone down the same route as my husband. Think I was so desperate I just did it. I now have 1 year left and will be debt free. No advice really apart from my story and perhaps look into a similar scheme where their was no interest. It was something like repayment plan.

Soontobe60 · 06/04/2022 07:01

One thing to be wary of is that you may well start to think - oh I’m £500 a month better off now - let’s buy a new car / go on holiday / get a new phone - and before you know it you’re even worse off. Been there and bought the t shirt!
The only way we got out of this was to be really brutal with our spending. We had a consolidation loan over 7 years, reducing our repayments by around £250 a month. But we also overpaid the new loan by £150 a month, and left the extra £100 in the bank to reduce our overdraft. We used cash drawn out weekly for all our food shopping, didn’t use debit cards at all except for petrol, and were pretty ruthless in not spending anything extra. No takeaways, no trips, no new clothes. Nothing. It became a challenge to see how much we could pay off against our debts each month. We eventually became debt free after only 4 years, paying off our consolidation loan 3 years early. From then we had already developed the saver habit, so pretty soon our savings became healthier. We vowed never to buy on credit again, and have stuck to that. The only exception is if something we need is interest free. We have a separate account where we will put in the whole amount before purchase but set up monthly payments to pay it off. Although that account has low interest rates, psychologically it ‘feels’ the best thing to do.
Having some active credit that you manage well on your file may well stand you in good stead should you apply for a mortgage or something similar in the future.

BarbaraofSeville · 06/04/2022 08:18

Yes, the downside is that you continue to overspend and end up with credit card or overdraft debt alongside the loan.

Or you still spend on non essentials without putting money aside for 'unexpected' expenses which in reality are things that will or very likely to happen sooner or later (insurance, Christmas, car expenses, white goods replacement etc etc).

But if you regard the consolidation loan as a 'one off last chance' solution alongside better budgeting so you put money aside to cover annual and irregular expenses before spending on non essentials the fixed endpoint and lower interest rate can help you get out of debt once and for all.

OldTinHat · 06/04/2022 08:25

Martin Lewis has a template letter that you can use to write to all of your creditors asking them to stop interest and fees and renegotiate an affordable payment plan. I did this and also helped a friend do the same who had been repossessed. Very easy and you can be debt free very quickly.

teaandtoastwithmarmite · 06/04/2022 08:27

I did this as I had four credit cards and I've just finished paying the loan off early! When I had the cards I was drowning. My bank would only lend me the money as long as I transferred the card balances on to it whilst I was in the branch and close every card (except theirs ). The card companies were being difficult but I did close them and it was the best thing I did.

BarbaraofSeville · 06/04/2022 09:12

@OldTinHat

Martin Lewis has a template letter that you can use to write to all of your creditors asking them to stop interest and fees and renegotiate an affordable payment plan. I did this and also helped a friend do the same who had been repossessed. Very easy and you can be debt free very quickly.

That's an arrangement to pay and if the OP gets the loan, it doesn't sound like she needs that.

You need to be very careful about maintaining your credit rating if it's still good and you can make the payments, because if you start missing payments and going down the debt management route, which is what this post is suggesting, that's potentially a ruined credit rating and being unable to get a good mortgage or credit for 6 years.

WelshyMaud · 06/04/2022 10:03

Personally I am very wary of consolidation loans. For people who've struggled with money management and debt, very often it results in being back in the same position in 2 years time anyway on credit cards and such but you have the loan on top too. No judgement here, been there and did that ourselves.

What do you mean by 'old debt'? Old as in already defaulted and paying off through a payment plan or third party debt agent? If that's the case, there's no fear of credit reference agency impact because the default is done anyway and disappears in 6 years - do yourself an income and expenditure breakdown and fudge your figures a bit to show £10 disposable a month - then offer them a fiver. Plough the extra into your credit cards.

Transfer cards to 0% if you can.

SimpleFastMortgageDotCom · 06/04/2022 11:53

Remember that if you don't pay a loan of credit card you could end up with a CCJ, but if you consolidate using a mortgage, and don't pay the mortgage, the property could be repossessed.

SpinachIsAGatewayDrug · 06/04/2022 15:22

As above, the main downside is that you are tempted to keep the cards ("just for emergencies") and you end up using them for little bits and pieces - then, before you know it, you have CC debt again and a loan to pay off.

Only you know how disciplined you are - but really DO think about committing to closing down the card accounts if you go for the loan. Put that money into savings and rely on that instead.

A 0% card is a good option. Look at someone like Clear Score who give you a free credit score plus links to 0% cards who are likely to accept you. Remember to reduce credit limits or close down cards where you have transferred some/all of the debt. Do not leave yourself with lots of unused credit card balance that it will be tempting to spend.

Hoppinggreen · 06/04/2022 18:24

It can work but you must cut up the cards and close the account and not get anymore
Once you pay off the cards you may find they offer you more credit or you Will get other offers so don’t be tempted

teaandtoastwithmarmite · 06/04/2022 22:50

I suggest going on credit karma as they put all your balances together and let you know what you're likely to be approved on. Also you get a score and I enjoy seeing mine go up

Original poster

LeastofLeicester · 06/04/2022 23:52

Urgh! Just wrote out a long reply and lost it!

Thank you all.

Plan is to cut up/cancel all Cc bar 1 (with a £500 limit) and use that for the weekly food shop, and pay off in full each month. £500 is roughly our food budget so won't be able to overspend. Plus keeping a cc we pay off in full each month will keep our credit score going.

Out off the £500 'extra' each month, £200 will be disposable and £300 in savings.

Our credit scores are both 'good' but I want to get them to excellent before we remortgage in 2.5 years.

My main reason for wanting to do this is to build up some savings. We've been using the CCs for emergencies but if we can build up savings, we won't need to. That's the plan anyway!

Definitely do not want to do a 0% CC. No more CCs!!!

Unsure whether writing to the companies would work as we've always paid on time, from their end they wouldn't believe we're struggling, which I guess we're not as in we can afford to pay...just can't afford anything else!

We're going to muse on it for a few weeks before we make any loan applications. We're already registered with clearscore etc. so we can see what we're likely to be approved.

OP posts:

Original poster

LeastofLeicester · 06/04/2022 23:55

Just to add, I'm very strict with our budget so not worried about making the repayments.

OP posts:

BarbaraofSeville · 07/04/2022 05:10

All sounds good but you may need to rethink 'Plan is to cut up/cancel all Cc bar 1 (with a £500 limit) and use that for the weekly food shop, and pay off in full each month. £500 is roughly our food budget so won't be able to overspend' as you'll run out of credit limit as for much of the month you'll have around 6/7 weeks of spending on it due to the delay between the spend and the bill being paid.

Using a credit card for some of your normal spending and paying it off in full every month is a good way to demonstrate responsible credit use but you need the card limit to be higher.

Exceeding the credit limit or even using a high percentage of the limit is seen as a bad thing by lenders, even if the limit and spend is low.

Whereas staying within the credit limit and preferably using a small percentage of it (well under half) is better. Also showing that you've been allowed a higher limit also good. If other lenders see a £500 limit, that shows them that you're not to be trusted with credit.

So I'd keep a card with a minimum of £2-3k limit for your groceries rather than £500 for the reasons outlined above.

Jmaho · 07/04/2022 17:12

@LeastofLeicester