Are too many payments keeping you down each month? Consolidating your debt could make your finances easier to manage and could save you money. Use this guide to learn when consolidation can free up your budget, what types of debt you can consolidate and other options for getting out of debt.
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What is debt consolidation?
Debt consolidation is the process of combining multiple debts into one, manageable monthly payment – often with lower interest. Debts could include credit cards, overdrafts or car finance payments.
The best way to consolidate debt depends on factors like the amount and kinds of debt you have, your income and your credit score. When you consolidate debt your goals might be to:
Reduce the overall cost of borrowing
Pay a manageable amount each month
Reduce the number of payments you’re having to make (and in turn the admin and possibility of letting one debt slip)
A good debt consolidation solution will achieve all three of these aims. However, if reducing monthly outgoings means committing to a very long loan that will cost more overall, it may not be the right solution. Sometimes existing credit arrangements might have penalties for exiting early, so it’s important to factor these in when working out your cheapest option.
It’s worth noting that “debt consolidation” is usually a reason for taking out a loan, rather than a class of loan in itself. However, some lenders might market their loans as “debt consolidation loans”. In a few very specialist cases, the funds from a debt consolidation loan might be issued directly to your creditors rather than to you.
What about a credit card?
A balance transfer credit card could actually be a very smart choice for some people. These cards allow you to transfer debts to a new credit card, and come with an introductory interest-free period – sometimes over 24 months – buying you time to focus on reducing your debt.
Balance transfer credit cards with long 0% periods typically require applicants to have good credit. Thankfully, almost all card issuers now offer a fast and easy-to-use “eligibility checker” facility, so that you can find out if you’d have a decent chance of getting approved before you apply. These involve a “soft” credit check, which means they won’t affect your credit score.
Comparison of 0% balance transfer credit cards
Comparison ordered by length of 0% balance transfer offer with affiliated products shown first.
You could opt to remortgage. This isn’t a decision to be taken lightly, since it involves securing the debt against your property. However, many people don’t realise they’re paying more than they need to on their mortgage and that switching to a new lender could make a big difference.
Just we wary that a £5,000 loan paid off over, say 20 years, is usually going to work out much more expensive than a £5,000 loan paid off over 3 years.
Ultimately, if a debt consolidation plan doesn’t lead to you getting debt-free as soon as possible through affordable monthly payments, it’s not a wise course of action.
You can access free advice at the government’s Money Advice Service. If your debt is simply not manageable, a debt advisor can help find ways to manage debts even if you have no spare money.
Frequently asked questions
You can bring across as much or as little as you choose, but the right debt consolidation option should help you reduce outgoings and lead to your becoming debt-free.
Absolutely. If you have more than one credit card from different brands you might be finding it hard to manage your interest repayments. By rolling your existing debts into a new consolidation loan or balance transfer credit card, you could pay less interest, lower your repayments and get debt-free quicker.
Chris Lilly is a publisher at finder.com. He's a specialist in credit-based products including business and personal loans, mortgages and credit cards, and is passionate about helping UK consumers make informed decisions about their borrowing. In his spare time Chris likes forcing his kids to exercise more.
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