If you are having difficulty keeping up with the monthly repayments because they are too high, then a debt consolidation loan can significantly reduce the payments each month to a more affordable level. This is a new loan which is taken out to pay off all or some of your existing debts.

You will still need to make payments every month to repay this new loan but, because it's now spread out over a longer period, the monthly repayments will be less leaving you with more to cover your other expenses. Reducing debt stress can be the main benefit with the right consolidation loan because the single lower payment each month can make it easier for you to cope with the monthly outgoings.

Instead of having to make several payments every month to various lenders on credit cards, hire purchase and other types of borrowing it may, also, be easier to administer just one payment every month.

Although the monthly repayments are now lower, and the APR on the debt consolidation loan may be lower than on your existing debts – making it a cheaper loan – the total amount to be repaid can be higher because there will usually be a higher number of monthly repayments. This loan period is usually fixed so you can know exactly when you will completely settle this debt.

Another possible reason for consolidating loans is to try and prevent getting a bad credit rating or to stop it getting any worse. If you are making late payments or defaulting on your credit cards or hire purchase agreements or personal loans, then there is a risk that being in arrears can hurt your credit rating which can make it more difficult to get credit in the future. Late payments are usually recorded in your credit reference file at the credit reference agencies and potential lenders can use these records of late payments to score against you when you apply for new credit. Consolidating the debts into one new debt may make it easier to focus on making that one lower payment on time.

A debt consolidation loan will, usually, be secured against your home, especially if you do not have a good credit rating. So if you do not keep up with the repayments, the lender can sell your home to pay off the money that you owe.

Getting quotations if the provider uses 'quotation searches' on your credit report should not affect your credit rating because quotation search footprints tell potential lenders that these are not actual loan applications but quotes. Wherever possible the finance broker or lender should use quotation searches (not application searches) to assess your eligibility for the loan when providing a quotation.

Summary of possible advantages of debt consolidation loans

• Can reduce debt stress because the lower monthly payments leaves you with more money to cover your other expenses.
• Paying off existing debts so as not to be in arrears can prevent you getting a bad credit rating.
• Dealing with just one payment to one lender can make it much less hassle for you to handle.
• Can have a lower APR to make the loan cheaper.
• Can have a fixed term so you know exactly when the debt is cleared.

Summary of possible disadvantages of debt consolidation loans

• A larger loan which must be paid off over a longer period.
• A fee to set up your consolidation loan.
• A loan secured against your home means that the lender can sell your home if you do not keep up with repayments.