Sainsbury’s Bank have recently conducted research revealing that more than 180,000 UK individuals will be using personal loans to consolidate debt in the first quarter of 2017.
They projected that the average loan size will be almost £11.5K meaning that the total amount borrowed could exceed £2billion.
Worryingly, £11,500 is 20% higher than the average loan size for debt consolidation purposes. This indicates that many may have found themselves overspending over the Christmas period.
Despite this, using personal loans to defeat credit card or short-term loan debt is a sensible option. Personal loan rates are at an all-time low, with Sainsbury’s themselves offering their £7,500 – £15,000 at just 2.9% APR.
Consolidating high interest debt with a low-rate personal loan will not only save you significant cash over-time, but it’ll give a sense of financial control and organisation subsequently improving your mental well-being.
If you are considering taking out a personal loan for debt consolidation, here are several top tips to bear in mind.
1. Calculate exactly how much you need
Taking out a loan is a decision that shouldn’t be taken lightly. Prior to applying you need to spend some time calculating how much you really need to borrow.
A common mistake that many make is borrowing more than they need to be on “the safe side”. Doing this will just result in paying back more in interest over the course of the loan.
Simply add up all the debt you have and this is how much you need to borrow.
2. Calculate your monthly repayment affordability
Now that you know how much you need to borrow, it’s time to work out how much you can afford to pay back each month.
To do this, you’ll need to create a monthly budget. This may involve collecting some recent bank statements or simply logging into your online banking.
Deduct all monthly outgoings from your income. The number you’re left with is your disposable income.
From your disposable income, you can decide how much you’d like to commit to the loan repayments. It may be sensible to leave £50 – £150 per month as a safety net against financial emergencies.
Knowing how much you need to borrow and how much you can afford per month will give you a good idea of the best loan term for you.
Remember, larger monthly repayments will mean a shorter loan term (i.e. debt free quicker) and subsequently less accrued interest.
3. Do your research
Before jumping into an application with the cheapest provider, it’s important that you do some research.
The lowest-rate loans will be reserved for those with an immaculate credit history, if you haven’t got this you’re unlikely to get approved.
Getting declined for a loan application may further affect your ability to get credit in the future. This is because every time you credit file is searched, a digital footprint print is level. If a lender sees that your file has been searched several times in a short period, it may indicate urgency or desperation to get cash.
For this reason, it’s a good idea to get a credit report from a free service like Noddle. This will give you a good idea of the types of loan products that will be available to you.
If you find that your credit history isn’t that good, then it may be worth looking at specialist bad credit loan types like guarantor loans. These will allow you to borrow up to £10,000 and spread the repayment over terms of up to 5 years.
If you find yourself struggling to organise debt following the festive period, then consolidating it with a personal loan can be a fantastic solution.
Avoid rushing into the application though. Do your calculations and research your options.
If you would like more information on any type of loan, please feel free to contact us on 01603 391104 or email us on firstname.lastname@example.org.