The convenience that loans provide often leads to debt accumulation. Undoubtedly, it could be challenging to keep up with the dates of payments. Falling behind on payments will not only damage your credit score but it will also elevate the total debt amount. Over time, you will find yourself caught in an unbreakable cycle of debt.
If handling multiple debts is getting beyond your control, consolidation might prove to be the best method to address this concern.
What are debt consolidation loans?
Debt consolidation loans are personal loans that you take out to discharge your existing debts once and for all, with one monthly payment on the new loan. A personal loan is called a consolidation loan as it combines all of your short-term, high-cost debts. They are considered an ideal option as the cost is spread across months.
How does debt consolidation work?
Consolidation simplifies the number of payments and lowers your monthly payments. There is a possibility of qualifying for lower interest rates, which helps you save money on interest, if your credit score is up to scratch.
Short-term high-cost debts are small emergency loans, quick loans, and bad credit loans. Suppose each loan has an outstanding amount worth €1,000. The combined debt value is €3,000.
You will take out a personal loan of €3,000 to discharge other debts once and for all, so you will have only one personal loan to deal with. Since it is paid back in fixed instalments, monthly payments will be lower, making the debt more manageable.
Do you need a good credit score to get a consolidation loan?
Debt consolidation loans in Ireland are generally approved when your credit score is perfect. Most of the lenders do not approve these loans if you have already missed a payment. Therefore, it is recommended that you consider applying for these loans before falling behind on payments.
However, some lenders are out there who provide these loans to subprime borrowers as well, but they charge high interest rates, increasing the size of monthly payments and the total cost of the debt. You may not find a deal affordable when your credit score is subpar.
Can all types of loans be consolidated?
No, only short term loans in Ireland could be consolidated. In other words, debts with high interest rates that are paid off in one fell swoop are only consolidated. Instalment loans such as mortgages and auto loans cannot be consolidated.
In order to consolidate credit card bills, you need to apply for a 0% balance transfer card. These cards charge balance transfer fees but offer an introductory period during which you can repay your debt without paying interest.
Will lenders consolidate all short-term high-cost debts?
No, there is no guarantee that lenders will consolidate all short-term high-cost debts. For instance, if the total debt you owe is €3,000, it is not guaranteed that a lender will lend you this much money. At the time of approving a personal loan, they will check your credit score and income sources.
If they find that your financial stability is not strong enough, they will not sign off on your application. Most of the lenders generally do not lend more than €1,000. It means you will have to deal with some debts separately despite applying for consolidation loans.
What are the upsides and downsides of consolidation loans?
Here are the pros and cons of consolidation loans:
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Advantages |
Disadvantages |
|
Consolidation loans will enable you to qualify for lower interest rates. |
The repayment term will be longer, which means increased total interest. |
|
They can simplify repayments. |
They are not suitable for low-interest debts. |
|
The chances of falling behind on payments are slightly lower. |
It requires a good credit score. Subprime borrowers struggle to get approval. |
|
They improve your debt-to-income ratio. |
The risk of accumulating debt is too high if you do not change your spending habits. |
What do you need to be eligible for a consolidation loan?
In order to be eligible for a consolidation loan:
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You should have a stable source of income. Make sure that you have pay slips and bank statements to prove your income
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Your credit score should be good. Aim for a fair credit rating.
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Your debt-to-income ratio should be less than 40%.
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You must be a resident of Ireland.
What risks are associated with consolidation loans?
Here are the risks associated with consolidation loans:
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The repayment term of consolidation loans could be a bit longer. You will be required to settle the debt over a period of 12 to 18 months. These loans might turn out to be more expensive than separately dealt debts.
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Consolidation does not reduce the loan amount. It is still likely that you struggle with payments. If you use a balance transfer card, you might rack up credit card debt once again. It is vital to change your spending behaviour.
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Consolidation requires fees. Debt consolidation loans also charge early repayment and late payment fees. Make sure that you compare those fees before applying for them.
What are the alternatives to consolidation loans?
Consolidation might not be a suitable option for everyone, but it does not mean that you cannot get out of debt.
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Use a debt avalanche method, aimed at those who want to pay off debts with high interest rates first while paying off the minimum balance on others.
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Use the debt snowball method, aimed at those who want to pay off the smallest loan first to feel motivated in their debt settlement journey while paying off the minimum balance on the others.
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Use a debt management plan as a last resort when other methods fail. This will show up on your credit report and cause a wreck on your score for seven years.
Summing up
Debt consolidation in Ireland can ease payments and help save money on interest. Consider other alternatives as well, so you can choose the best repayment strategy. Take advice from a debt expert if you cannot make a decision.
