Turned down for a consolidation loan? There may be another way
Many people look at consolidation loans first, and for some they work well. If you've been declined, or you're worried that another loan will only make things worse, IndividualVoluntaryArrangements.net can help you look at the alternatives. We'll explain whether an IVA or another solution could deal with your debts without any new borrowing.
If a consolidation loan looks like your best option, we'll say so. You need a solution that lasts, rather than one that moves the problem around.
Signs you should talk to us
- You've been declined for a consolidation loan
- You're borrowing to keep up with existing repayments
- A previous consolidation loan didn't solve the problem
Consolidation works best when your debts are manageable, your credit rating is still good, and the new loan costs less than what you're paying now.
How debt consolidation works
You take out a new loan large enough to pay off your existing debts, such as credit cards and overdrafts. You then have one monthly payment to one lender, usually over a fixed term.
Pros and cons
Why consolidation can help
- One simple monthly payment
- Can reduce interest if the rate is lower
- Fixed end date
- Not a form of insolvency
The risks of consolidating
- Hard to get if your credit rating is already damaged
- Can cost more overall over a longer term
- Secured loans put your home at risk
- Risk of building up new debt on cleared cards
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
When consolidation isn't the answer
If you're already missing payments, can't get a loan at a lower rate, or would struggle with the new monthly payment, borrowing more is unlikely to help. A Debt Management Plan or an IVA may be more realistic.
Consolidation loan or IVA: which is better for me?
| Consolidation loan | IVA | |
|---|---|---|
| Total repaid | All the debt, plus interest | What you can afford; the rest written off |
| Credit rating needed | Usually good | Not a factor |
| Effect on credit file | A new loan; no insolvency record | Recorded for six years |
| Legal protection | None | Yes, once approved |
| Risk to your home | Yes, if the loan is secured | Equity may need releasing near the end |
A consolidation loan suits people whose debts are still manageable and whose credit is in good shape. An IVA suits people whose debts have grown beyond what they can realistically repay.
What does a consolidation loan really cost?
A lower monthly payment can hide a higher overall cost. If a new loan spreads your debts over a longer period, you may pay more interest in total, even at a lower rate. Arrangement fees and early repayment charges can add to the cost. Before taking out a consolidation loan, compare the total amount repayable with what you'd pay under your current agreements.
Consolidating debts into your mortgage
Some people release equity or extend their mortgage to clear unsecured debts. That can reduce the interest rate, but it turns unsecured debt into debt secured on your home and often stretches it over many more years. If you later fall behind, your home could be at risk. Independent mortgage advice is essential before taking this route.
Declined for a loan? Avoid repeated applications
Each full loan application leaves a hard search on your credit file, and several in a short time can make lenders more cautious. Many lenders offer eligibility checkers that use a soft search, which doesn't affect your credit rating. If you've already been declined, it's often a sign that borrowing more isn't the answer.
When consolidation can work well
A consolidation loan can be a sensible choice in the right circumstances. It tends to work well when:
- Your credit rating is still good enough to get a competitive rate.
- The new loan costs less in total than your current debts.
- You can comfortably afford the new monthly payment.
- You'll close the cleared accounts so the balances don't build up again.
Balance transfer cards as an alternative
If most of your debt is on credit cards, a 0% balance transfer card can reduce interest for a set period, usually for a transfer fee. It works best if you can clear the balance before the promotional rate ends. If you'd only be moving the problem from one card to another, it's unlikely to help in the long run.
Credit unions
Credit unions are member-owned financial co-operatives that offer savings accounts and loans, often at lower rates than high-cost lenders. Some will consider people who've been turned down elsewhere. Their interest rates are capped by law, which makes them a safer option than payday or doorstep lenders.
Guarantor loans
A guarantor loan relies on someone else agreeing to repay if you can't. Interest rates are usually high, and if you fall behind, the lender can pursue your guarantor for the full amount. Using a guarantor loan to consolidate debts can put a strain on relationships, so think carefully before asking anyone to guarantee your borrowing.
Talk to us about the alternatives
If you're unsure whether a consolidation loan is right for you, or you've been turned down, send us an enquiry using the form at the top of the page. We'll explain whether an IVA, a Debt Management Plan or another option could deal with your debts without new borrowing.
Before you apply for any new credit, compare your options properly. Our debt solutions comparison sets out how a consolidation loan differs from an IVA, a DMP and a Debt Relief Order, and the IVA calculator gives a quick illustration of what an IVA might look like for you. A short conversation can then help you decide whether more borrowing really is the right answer, or whether another route would serve you better.