One finds it hard to cope with liabilities that require one to save a huge lump sum. It could be rent, credit card bills, car repairs, etc. Not meeting the liabilities leads to loan default. The series of missed payments in your credit report reveals the challenges you face in clearing the dues. 

You may be thinking, “Will this loop of debt cycle ever end?”  Fortunately, yes. You can end this cycle of encountering or defaulting on every payment by clearing the backlog at once. Yes, it is very much possible with the help of a debt consolidation loan.

It is the financial facility that helps you merge or settle multiple payments at once with a single monthly payment. Instead of paying separately, you just deal with a single provider. It simplifies money management, releases stress, and improves financial stability. It helps you get back on finances with a stronger credit score.

What does a debt consolidation loan mean?

A debt consolidation loan is a financial facility that helps an individual pay multiple bills with a single-payment loan arrangement. It is ideal for individuals with heavy debts and facing difficulty in managing one. It could be secured or unsecured, depending on your needs, financial potential, and circumstances. The interest rates on such loans are usually competitive. It is because it is a long-term loan. It means you eventually pay more interest over time.  It is ideal for businesses and individuals seeking comfortable loan management.

However, you can reduce the interest liabilities by choosing a fixed-rate loan. It prevents you from paying more if the economy slows down. Alternatively, you may benefit from a variable-rate loan if the economy improves. It helps you benefit from the low interest rates. Your monthly payments and interest liabilities drop, and you pay less. Alternatively, in inflation, you must pay a high interest and repayments on the loan.

What is the difference between fixed and variable-rate loans?

The basic difference between the fixed and variable-rate debt consolidation loans is- interest rates. The interest rates stay the same on a fixed-rate loan. It eliminates any financial surprises. Alternatively, the interest rate may change according to the economic performance of variable rates. It is generally better for a seasonal worker with fluctuating or inconsistent pay.

Fixed interest rate loan	Variable interest rate loan
Monthly instalments stay the same until the loan term	Monthly instalments may rise or drop according to the changes in the economy
Fixed-rate loans are predictable and ideal for long-term loans	These are ideal for individuals who want to benefit from the interest rate drop and temporary savings.
The facility to budget and repay the dues timely limits the default chances	The possibility of a rise and fall in the rates prevents one from budgeting impactfully. However, you may fetch a variable-rate loan at better interest than a fixed-rate one.

Should you choose a variable-interest loan with a bad credit history?

If you have a bad credit score in the UK, you must consider a fixed-rate loan. It is because getting a debt consolidation loan with a bad credit score is challenging.  A fixed-interest loan application may help you qualify easily. In this, you pay a fixed amount without losing your grip on the payments. It is eventually better from the credit perspective also.

Getting debt consolidation loans for bad credit from a direct lender requires you to prove responsible credit management and payment potential. Provide recent proof of income if seeking an unsecured loan. You must meet the income criteria to get a loan with a poor credit history. Proceed by knowing your liabilities through a loan calculator.

What should you consider before choosing between fixed and variable terms?

One of the best benefits of a fixed-rate debt consolidation loan is that it shields you from the rising interest rate. You don’t pay extra due to the economic changes. Alternatively, a variable-rate loan helps you save money if interest drops. It may be like a windfall arrangement. Here is what to consider before choosing between a fixed and variable-interest loan:

1)     Nature of the income

It is one of the most important parts to decide before choosing between fixed and variable rate loans. If you have a fixed and handsome income, you can repay the dues easily. In this case, a fixed interest term would be ideal for you. Alternatively, self-employed, part-timers may consider a variable-rate loan.

2)     Size of the loan amount

Generally, it is ideal to repay the huge lump sum in a fixed repayment plan. It eliminates any surprises down the line. Moreover, you would not want to pay a higher amount under a variable rate. It is in the situation if the interest rates increase drastically.

It is particularly proving challenging for someone living paycheck-to-paycheck. However, if you borrow a small amount, you can choose a variable interest rate. It is if that fits your income module. The amount will increase slightly or drop according to the economy. Thus, it would not affect the payment ability much.

3) Impact on credit score

A debt consolidation loan is a long-term loan that you must repay within the given time tenure.  Missing a repayment may mean extra payments. However, you may get the facility to clear the dues early on a variable-rate loan. However, it is not always the chance. Only a few providers offer this facility. However, always check for an early repayment facility.

Consider it if seeking a debt consolidation loan for bad credit from a direct lender nearby. Paying early will help you save on interest liabilities. It also improves your credit rating and reduces the total amount to pay. It means- you benefit from every angle with a pre-payment facility. Always enquire about the additional charges before seeking a loan.

4) Potential to take the risk

As you know, choosing a variable rate may mean paying more. It does not guarantee that the interest rate will drop. Thus, there stays a risk factor of paying more than the existing agreement. Are you comfortable with that risk? Is your present expense bucket ready to feel the additional payment jerk?  If yes, then you may proceed with the repayment term.

Bottom line

Thus, choosing the right interest type for your debt consolidation loan is important. It also impacts indirectly the costs of the debts that you want to consolidate. Choosing fixed interest terms safeguards you from paying extra if interest rises. Alternatively, you may benefit from an interest rate drop on a variable-rate loan. Identify the risk-taking potential, loan size, and income type. It will help you decide right for your finances.