How does debt consolidation work?

How does debt consolidation work?

author: Bryony Pearce

By Bryony Pearce

From what it actually is to its step-by-step process, we’ve taken a good look at how debt consolidation actually works.


The term ‘debt consolidation’ can be a bit daunting. It comes riddled with assumptions that it’s for people with tons of debt hanging over their head, and often it’s seen as something that’s difficult to understand. But neither could be further from the truth.

Consolidating two or more debts can be a practical way to streamline your finances - whether you’re struggling with repayments or not - and can even save you money, too.

If debt consolidation’s something you’re looking into, look no further, because we’ve stripped back the process from start to finish so you can see exactly how it works.

What is debt consolidation?

So, let’s add a bit more meat to the bones. As we’ve already mentioned, debt consolidation is for people who have two or more debts they’re currently paying off. When we say ‘debts’, this can be anything from credit cards and personals loans to store cards and overdrafts.

There are a number of reasons people opt to consolidate their debts and, contrary to popular belief, not being able to manage them isn’t always the main driver. Debt consolidation can:

  • Make your finances easier. By bundling all your debts together, you’ll have the luxury of one repayment date, one interest rate, and one balance to keep on top of.
  • Save you money. If your credit history has improved since you took out the credit you’re repaying, you might be able to bag yourself a lower interest rate.
  • Help clear your debt quicker. If you’re saving money on interest, you may have more money free to pay off your outstanding debt sooner.
  • Make your repayments more manageable. If you’re struggling to meet all of your monthly repayments as it is, consolidating your debts could enable you to reduce your monthly installments so your finances aren’t quite as stretched. Bear in mind, though, this could increase your interest and the total amount you repay.

Debt consolidation: the process

The process will largely depend on how you choose to consolidate your debts. Your main options are:

So, let’s take a look at a top-line overview of how the set-up for each looks.

1) Work out your outstanding balances

If you’re leaning towards a debt consolidation loan, this will help you work out which type is most suited - a personal debt consolidation loan or a secured debt consolidation loan.

If you’ve amassed quite a lot of debt (i.e. £10,000+), a secured debt consolidation loan could work for you. However, to be accepted for these kind of loans, more often than not, you need to own your own home.

And if you’re leaning towards a balance or money transfer card, this’ll allow you to get an understanding of the fees involved, and whether or not their limits are enough to cover what you owe.

2) Do your research

Debt consolidation only makes sense if it benefits you financially or makes your life easier. To make sure you come away with one or both of these advantages, it’s important not to rush the research stage.

So, make sure you do the maths and compare things like:

  • How much interest you’re paying now vs how much you could be paying
  • How long it’ll take you to clear your debt
  • What the monthly repayments mean for your budgeting.
  • Are there any Early Repayment Charges on your existing debts?

3) Transfer your debts

Once you’ve decided on your debt consolidation option, done your research and been accepted, it’s time to transfer your debts to your new, singular lender.

This might slightly vary depending on the route you’ve gone down, but, quite simply, all you need to do is use the funds you’ve been granted with either your loan, balance or money transfer card to pay off your existing lender in one lump sum.

4) Stick to your installments

After all your existing debts have been cleared, all that’s left to do is repay your new lender. If you went down the road of a loan, this means sticking to your monthly installments on time and in full each month. And if you opted for a balance or money transfer card, it means chipping away at what you owe each month with as much as your finances allow.

When debt consolidation doesn’t work

So, so far we’ve taken a look at their benefits, shown how simple they are in practice, and put debt consolidation in a pretty good light, right? But there are some downsides to debt consolidation which should always be taken into consideration, like:

  • You could end up paying back more overall
  • You could increase the time it takes to pay off your debts

These points often go hand in hand. Even if your monthly payments are lower, spreading them over a longer term could mean your interest payments will outweigh what you save in the long run – as a longer term typically means you’ll make more interest payments.

And last but certainly not least:

  • If you’re hard up financially and your debt and money management is spiralling out of control, debt consolidation might not be the answer. In this case, contacting a debt adviser may be the right course of action to help get your finances back on track.

Like this article? Find out more about different debt consolidation options

Disclaimer: All information and links are correct at the time of publishing.

author: Bryony Pearce

By Bryony Pearce

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