Your finances are trapped in the circle of multiple debts. These may include credit card balances, loan monthly instalments, utility bills and many more. To get out of this trap, what should you do? Options may be many, but the best among them is consolidating every debt into a manageable loan. It can be an effective way to manage finances better.
How would you consolidate your debts? One can be a low-interest, unsecured personal loan. Yes, you can find that kind of loan primarily from the direct lending market in the UK.
Let us do a detailed explanation of loans’ meaning, advantages, disadvantages and innovative strategies to decide the best option for you.
Unsecured personal loan and debt consolidation: Know their meaning
Before opting for any other debt, you should know their meaning first or what features they have for the individuals. Here is the explanation:
Unsecured personal loans: In these funding options, you do not need collateral to get a loan. The lender will evaluate your creditworthiness and monthly income capacity.
Debt consolidation: In this process, you borrow a lump sum amount to clear several debts. After that, you will repay the fresh loan but with one instalment and interest rate.
By getting unsecured loans to consolidate debts, you will replace them with a single and expectable amount. It will reduce your stress and simple monthly instalments.
What are the advantages of low-interest unsecured personal loans?
Here are the possible pros of these types of personal loans to clear your multiple debts:
- Lower interest rates
There are many personal loans available in the UK marketplace where you can get significantly lower interest rates. These are much cheaper than credit cards.
You may ask, “What is the low interest unsecured personal loans rate UK?” Let us take an example. A credit card can have an interest rate of around 20% or more. On the other hand, a personal loan can ask for a 9-12% interest rate based on individual affordability.
- Flexible loan terms
Generally, most of the UK lenders keep the repayment schedule from 12 months to 60 months. Sometimes, the maximum duration can go up to 84 months. You can decide the loan term according to your comfort and capacity.
Following the term with no miss or default can be beneficial for your credit scores.
- Managing finances becomes simple
With one payment to make every month, you have fewer chances of missing or delayed payments. It means you can better manage your household budget alongside loan instalments.
Doing this provides you with much-needed psychological relief as you can focus on one debt rather than on multiple debts to handle.
- Improve credit record
Another significant benefit of no-collateral personal loans to clear debts is the improvement in the credit record. You can pay off all credit card debts and focus on the timely repayments of the loan.
All these things will help you build a positive credit history and improve loan approval chances for future borrowing.
- Predictable monthly instalments
You will be paying one fixed interest rate. There will be no surprises of increase in interest rates according to the market trends. You know the monthly instalments and can manage alongside your regular family expenses.
Apart from these advantages, you can keep your assets intact as there is no need to put them at risk.
What are the disadvantages of low-interest unsecured personal loans to clear debts?
Given below are the possible drawbacks of these loans:
- You must have a good credit score
If you want the best interest rate in your favour, you should have a good credit score. People with poor credit histories often have to pay higher interest rates.
- Loan fees and length
If you miss the terms and conditions of the loan agreement, you may have to pay various kinds of fees, such as origination fees, pre-payment penalties and upfront charges. These will affect badly to your savings.
Similarly, opting for a 5-year loan can have lower monthly instalments to pay but will have higher interest rates in total.
- Managing another debt
You want a loan to pay off multiple debts. Still, a loan is itself a debt. It means you are indulging in one another loan with fresh spending. You have to be very careful to have the on-time payment of this loan.
- Mandatory credit check
Applying for a new loan will include a fresh credit check. If it is a hard one, then it will impact your credit score. Therefore, to minimise this disadvantage, you have to look for a soft credit check loan deal.
- Overspending can harm your finances
You can come again to that mindset where you think previous debts have been cleared with a fresh loan. Now, you are free to spend pounds again. It will be harmful to your present and future finances.
What tips to follow while using low-interest unsecured personal loans for managing debts?
There are various ways to decide whether consolidation of previous debts with personal loans works for you.
- Before applying, you should calculate the loan interest rate according to the current trends.
- A detailed comparison of various loan deals provided by the companies with that rate.
- Use a personal loan calculator to analyse the total interest rate paid till a specific loan term.
- Try to have a shorter loan duration so that you need to pay lower interest rates in total as compared to a longer duration.
Following these tips will help you in debt consolidation with the best loan option available.
What are the other loan alternatives to consider?
If unsecured personal loans do not work for you, then considering other alternatives will be a wise decision. Here are some alternatives:
Debt consolidation loans: These are specialised funding sources, which are available for the sole purpose, i.e. to consolidate multiple debts into a single loan option. It will have a lower interest rate, too.
Secured loans: These loans also include lower interest rates, but you have secured the loan amount by placing an asset. It will work as the repayment backup if you default. Therefore, these loans can be risky sometimes.
Guarantor loans: What lender wants to give you low interest rates? Some sort of security of loan repayment. If collateral doesn’t work, you can add a guarantor to guarantee loan repayment with no miss or default.
Smart strategies to follow while opting for an unsecured personal loan debt consolidation
Below are some vital steps to pursue while choosing the best loan option and then borrowing to merge multiple debts:
Research for the best deal: Compare interest rates, fees, Pre-payment charges and terms across different lenders.
Read the agreement carefully: You should read all the terms and conditions given in the loan agreement, particularly related to hidden fees.
An affordable repayment plan: Choose an approachable repayment term that you can manage from your monthly income without any hassle.
Automatic payment deduction: Opt for an automatic deduction option to avoid any miss till the loan term ends.
Avoid credit card usage: During the loan term, do not use your credit cards more. It will only increase your debts, which become difficult to manage later.
Final discussion
A low-interest, unsecured personal loan can be a valuable source to diminish multiple debts. Of course, this has been backed up by advantages like low interest rates, no extra fees, better financial spending and enhanced credit rating.
At the same time, it may not work for you. For that, you should have discipline and awareness of the fees involved. Therefore, weighing all options regarding consolidation, debt management and changes in the daily habits.
It is your responsibility to look for the best source to consolidate multiple debts and improve your financial health.
