All-Encompassing Guide To Responsible Lending & Debt Consolidation

When borrowing funds, it is common for prospective lenders to assess one’s financial assets and liabilities before dispatching money. Lenders evaluate your financial situation to determine your creditworthiness and reliability when paying off your loan on time. Responsible lending is the process that helps lenders assess your ability to undertake a loan and make repayments without hindering your finances.

A debt consolidation loan is used to pay off multiple debts with a favourable interest rate and combine those payments into one. The borrower will pay one monthly fee instead of numerous charges each month.

While it sounds like an ideal solution, consider its advantages and disadvantages before going ahead with debt consolidation loans.

Responsible lending

There are numerous short-term financing options that can help you obtain funds at short notice, such as bridging loans and development finance. Both bridging finance and development finance loans offer investors a way out when facing a cash shortage. Irrespective of your choice of finance, responsible lending is a process that lenders rely on to predict your repayment ability.

Responsible lending enables the lender to decide whether you are in a position to repay the debt promptly. The process entails a detailed analysis of the applicant’s ability to make repayments without disturbing their financial situation and takes into consideration how potential future changes to market conditions may impact the applicant’s ability to repay.

Lenders use credit score examinations to understand how well you have been managing your finances. Your credit score report acts as a catalyst for a potential lender. To ensure that you can repay the money borrowed, the lender often inquires about your income, monthly financial liabilities, and regular expenses.

As per the FCA rules, credit card companies must monitor customers who get stuck in a ‘persistent debt’ cycle, including those who repeatedly make only the minimum monthly repayments over three years.

Responsible lending practices reassure providers and assist customers struggling with repayments by either asking them to switch to lower-rate products or suspending their credit cards to keep their debts in check.

Financiers generally carry out all the necessary inspections before approving customers’ loan applications. However, the terms and conditions of the loan are subject to change anytime during the loan tenure, which may impact the customer’s finances.

Debt consolidation

Debt consolidation is the ideal solution for people with multiple debts who wish to merge all their outstanding balances into one single amount instead of making separate monthly repayments. Taking a new loan may enable you to settle all your debts and streamline your repayments as a single amount to be paid every month.

In consolidated borrowing, there is no specific solution for everyone; interest rates on personal loans can be lower than other types of loans; however, applying for the advertised rate does not mean the lender will offer it. The interest rate offered varies depending on an individual’s circumstances, and it is often necessary to have a good credit record to obtain a loan.

There are various options to repay debts, such as switching the existing debts from credit or store cards to a card with lower interest rates or even a 0% balance transfer, subject to one’s credit score. No interest is paid during the initial term, so your monthly payments will directly clear your debts. The interest rate will be applicable if you do not clear the balance before the initial period ends. Some cards may charge balance transfer fees of up to 3%. Be aware of the promotional rates that only apply for a specific time.

Some options to overcome debt include working with creditors to settle the debt, using a home equity line of credit, or getting a debt consolidation loan. Debt consolidation loans pay off multiple creditors and combine those monthly payments into one, sometimes at a lower interest rate. It sounds like an ideal solution, considering both the pros and cons of debt consolidation. Debt consolidation combines two or more debts into a single, more considerable debt. Often, consumers burdened with a high-interest rate take a step towards debt consolidation. In simple terms, debt consolidation gives you more favourable loan terms and potentially more competitive interest rates.

Advantages and disadvantages of debt consolidation

Let us look at the advantages and disadvantages of debt consolidation:

Five advantages of debt consolidation

• Smooth Finances 

As debt consolidation combines multiple outstanding amounts into a single loan amount, it reduces the number of payments. You no longer have to worry about multiple due dates as you will only have one payment. Consolidation can improve your credit rating by reducing the chance of making a late or missed payment.

• Accelerate Payoff

Debt consolidation sometimes incurs less interest compared to individual loans. In that case, you may consider making extra payments with the money you save each month. If debt consolidation leads to an extension of loan terms, you may wish to ensure that your debts are paid off early to see the cost savings.

• May Decrease Your Interest Rate

Bank of England figures reveal the average annual interest rates offered on credit cards have increased to 21.49% compared with the introductory rate of 0.1%. It is the highest average credit card rate since December 1998. However, the rates vary depending on your credit score, loan amount, and the length of your credit card term. A lower interest rate may be available through a debt consolidation loan, meaning more of your monthly repayment is used to clear the outstanding balance.

• Could Reduce Monthly Repayment

Your overall monthly repayments may decrease with a consolidated loan by combining multiple payments into one manageable monthly figure. You may wish to increase the loan term to reduce your monthly repayment; however, you should take into consideration that a longer loan term may cost more overall.

• Can Help You Achieve a Better Credit Score

By consolidating your monthly repayments and outstanding balances, you may see your credit score improve. Each credit agency has its system to calculate the credit rating in the UK; paying a single monthly bill is considered by these agencies to raise your credit score, as opposed to making the minimum payment across several creditors.

Four disadvantages of debt consolidation

• May Add Up Extra Cost

Before going ahead with debt consolidation loans, make sure they do not involve additional fees such as arrangement fees, balance transfer fees, closing costs, and annual fees. Check the annual percentage rate of charge before you sign the loan papers, and ask the lender to confirm any other charges if you are unsure.

• You may pay more interest over time.

Even if your interest rate goes down while consolidating, you could still pay more in interest over the life of the new loan. If you have extended the repayment term of your borrowing, although your monthly interest may be lower, interest on your loan will continue to be incurred for an extended period.

• You risk missing payments.

Missing payments on any loan can impact your credit score, making it harder to obtain low-cost credit in the future. It may also result in a financial penalty from the lender, which could increase your borrowing costs. To avoid missed payments, you can enrol yourself in the lender’s autopay programme, or if you feel you can’t make a payment on time, whatever the reason, communicate with your lender as soon as possible.

• Does not solve the underlying financial problems

Consolidating debt can help to make debt more manageable; however, if you are habituated to living beyond your means, you may continue to borrow in addition to the debt consolidation loan. Making a realistic budget will help you stick to your financial goals.

How should I consolidate my debt?

Choosing to take a debt consolidation loan will depend on your financial circumstances. A few pointers when considering debt consolidation include:

• A good credit score will give you a better chance of securing a lower interest rate than you have on your current debt, saving you money.
• Your monthly repayment, interest rate, and repayment term are fixed. If you need a repayment plan to help reduce your debts, a debt consolidation loan might be right for you.
• If you do not like keeping track of multiple payments, a debt consolidation loan will combine all payments into one.
• Consider a debt consolidation loan only if you can afford to repay it; unlike credit cards, where you have the flexibility to make only the minimum repayment, a debt consolidation loan will have one monthly fixed repayment, and missing this could impact your credit profile.

How do I get a debt consolidation loan?

The following steps will help you go ahead with a debt consolidation loan.

• Lenders may have minimum credit score requirements; check your credit score to see if you meet the lender’s standard for providing a consolidation loan. Inaccurate and incomplete information will lower your chance of getting a consolidation loan.
• Decide your loan amount and add up the debt you want to consolidate to see how much money you need to borrow. Keep in mind that arrangement fees may be added to the loan amount.
• Thoroughly research various lenders; reviewing their websites will help you see eligibility requirements, loan terms, and fees. You can also take a debt consolidation loan from a bank.
• Prequalification will give you an estimate of the loan rate and terms. Lenders generally use a soft credit check to confirm your eligibility, so your credit score will not be affected.

While debt consolidation has several merits, it is essential to weigh up your options. Depending upon the nature of your project, its status, and stage, customised solutions are offered by our highly experienced team of professionals, who assist you in selecting the right product, the right loan amount and tenure, the very best interest rates, and complete details on repayment options. Contact us today to learn more about the best finance options available.