Debt consolidation explained (UK)

What is debt consolidation?

Consolidation is the process of taking out new credit to pay off several existing debts. The idea is to simplify your finances by making one payment each month, which may reduce your overall cost if the new credit has a lower interest rate or shorter term. However, it could also mean paying more over time if the repayment period is extended.

Ways to consolidate debts

• Balance transfer credit cards: These cards allow you to move existing credit card balances to a new card with a low or 0% promotional rate. You usually pay a transfer fee and must repay the balance before the promotional rate ends.
• Personal loans: You borrow a lump sum and use it to repay all your existing unsecured debts. You then make fixed monthly repayments over an agreed term. Interest rates depend on your credit score.
• Secured or homeowner loans: If you own property, you may be able to take out a loan secured against your home. Rates can be lower, but your home is at risk if you fail to repay.

Each method has different fees, interest rates and risks. Reading the terms carefully and comparing products can help you decide if consolidation is right for you.

Potential benefits and risks

The main potential benefits of consolidating include:

• Simplification: Managing one payment instead of several can be easier.
• Lower interest: If you qualify for a lower rate, you might pay less in interest overall.
• Fixed term: Some consolidation products have a clear end date, which can give a sense of progress.

At the same time, consolidation can bring new risks:

• Higher total cost: Extending the repayment period could mean paying more in interest over time.
• Secured debt: If you secure the loan against your home, you could lose it if you miss payments.
• Fees and charges: Balance transfer fees or early repayment charges may apply.

It’s also important not to see consolidation as a solution to underlying budgeting problems. You may need to adjust your spending habits to avoid building up new debt.

Things to consider

Before consolidating, ask yourself:

1. Will the new credit cost less overall once fees and interest are taken into account?
2. Can you afford the monthly repayments on the new product?
3. Are you eligible for the product given your credit history?
4. Have you explored other solutions such as a Debt Management Plan or IVA?

If you’re unsure, a free debt adviser can help you weigh up the pros and cons.

Sources

• MoneyHelper – Borrowing to repay debt
• Citizens Advice – Debt consolidation loans
• StepChange – Consolidating your debts