Bring your borrowing into a clearer plan.
Debt consolidation can combine multiple debts into one new borrowing arrangement. Understand how it works, what it could cost, the potential benefits and the risks before deciding whether consolidation is right for you.
What is debt consolidation?
Debt consolidation is a way of restructuring multiple debts into a single new borrowing arrangement. Instead of managing several separate credit agreements, you may use a consolidation loan to repay some or all of those existing balances.
The main attraction is simplicity. One repayment date and one lender can make your finances easier to track. Depending on the interest rate and term you receive, consolidation may also change your monthly payment.
However, a lower monthly payment does not necessarily mean the new arrangement is cheaper. Extending the repayment period can mean paying interest for longer, which could increase the total amount you repay.
You also need to consider fees, early repayment charges on existing borrowing, the APR on the new agreement, whether the new rate is fixed or variable, and whether any assets are being used as security.
Debt consolidation should therefore be treated as a financial decision rather than simply a way to reduce your monthly payment.
From multiple debts to one new arrangement
The basic concept is straightforward, but the financial details matter at every stage.
Review your debts
List your balances, interest rates, monthly payments, remaining terms and any fees or charges.
Compare options
Compare a potential consolidation arrangement with your existing borrowing, including the total cost.
Repay existing debt
If approved and suitable, the new borrowing can be used to repay selected existing debts.
Manage one arrangement
You then make repayments under the new agreement according to its terms.
Control new borrowing
Avoid rebuilding the balances you have just consolidated. A spending plan is an important part of the process.
Review your progress
Keep track of the remaining balance, payments and overall cost throughout the agreement.
A clear debt list can reveal whether consolidation makes sense.
Before looking for a new loan, understand exactly what you already owe. This gives you a baseline for comparing a consolidation offer.
What debts can potentially be consolidated?
Whether a particular debt can be consolidated depends on the lender and the terms of the new borrowing. Always check the specific agreement.
Credit Cards
Credit card balances can sometimes be included in debt consolidation, particularly where the new borrowing offers a different repayment structure.
Personal Loans
Existing personal loans may potentially be repaid using new borrowing, subject to the terms and early repayment conditions.
Overdrafts
An overdraft may sometimes form part of a wider debt restructuring strategy, depending on the new lender and affordability assessment.
Store Finance
Some store-card or retail finance balances may be considered, but the terms and costs should be checked carefully.
Vehicle Credit
Some vehicle-related borrowing may have specific settlement conditions, so check the agreement before including it.
Other Unsecured Debt
Other unsecured borrowing may potentially be included, depending on the lender, amount and applicant's circumstances.
Lower monthly payments vs lower total cost
These are two different outcomes. A consolidation loan can reduce your monthly payment simply by spreading repayments over a longer period.
Why could it become lower?
A new agreement may have a longer repayment term, which spreads the balance over more months.
Why could it become higher?
Paying interest over a longer period can increase the total amount repaid, even if each monthly payment is smaller.
APR is important, but it is not the whole story.
When comparing debt consolidation options, look at the complete cost of the new agreement and compare it with the cost of continuing your existing borrowing.
The question to ask is not just: “Can I afford the payment?”
Also ask whether the new arrangement improves your overall financial position and whether you can comfortably maintain the repayments throughout the term.
When could debt consolidation be worth considering?
There is no universal answer. Your existing debts, income, credit profile, spending habits and the terms you can access all matter.
Multiple payments feel difficult to manage
Combining debts could make your payment schedule simpler by reducing the number of accounts you need to manage.
You can access a competitive rate
If the new borrowing has a suitable rate and fees, it may improve the cost structure of some existing debt.
You need a clearer monthly plan
A structured repayment can make budgeting easier, provided the new payment remains affordable.
You can avoid rebuilding balances
Consolidation works poorly if old credit balances are cleared and then quickly accumulated again.
You understand the new term
You should be comfortable with how long the new agreement will take to repay.
Your income supports the payments
A new borrowing arrangement should fit your wider household budget rather than simply solve one month's cash-flow pressure.
How to approach debt consolidation step by step
Taking time to compare your current position with the proposed new arrangement can help you make a more informed decision.
List every debt
Record balances, APRs, monthly payments and remaining terms.
Calculate your current cost
Understand what your existing debts cost under their current arrangements.
Compare new borrowing
Check APR, fees, term, monthly payment and total amount repayable.
Check affordability
Make sure the new payment works with your income and essential household spending.
Debt consolidation is not automatically cheaper.
Understanding the potential drawbacks is just as important as understanding the potential benefits.
A longer term can cost more
A lower monthly payment may result from extending the repayment period. That can mean paying interest for longer.
Fees can change the calculation
Existing debts and new borrowing can have charges that need to be included when comparing options.
Credit applications matter
Applying for new borrowing can involve credit checks. Consider whether the application is appropriate for you.
Secured borrowing needs extra care
Some consolidation arrangements may involve secured borrowing. The consequences of missed payments can therefore be more serious.
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Debt Consolidation FAQs
Clear answers to common questions about debt consolidation, costs, eligibility and repayments.
Simplify your view of debt. Then make an informed decision.
Understand your current borrowing, compare the complete cost of any new arrangement and make sure the repayments fit your wider financial plan.