How to consolidate debt

What are my options for debt consolidation? 

The three main options for debt consolidation are:

• debt consolidation loan
• balance transfer credit card
• remortgage with additional borrowing

The best option for you will depend on your eligibility, affordability and individual circumstances.

1. Debt consolidation loan 

A debt consolidation loan is a type of credit you take out to pay some or all your existing debt. This would leave you with a fixed monthly loan repayment.

Steps to consolidate your debt

If you want to take out a consolidation loan, you’ll need to:

1. request settlement figures from your existing lenders
2. add them up – this is the amount you’re looking to get a loan for
3. check your affordability – by listing all your monthly incomings and outgoings 

You can use our calculator to estimate the monthly repayments depending on the loan amount and term. Spreading the repayments over a longer timeframe may mean you pay less each month but more overall.

There are two main types of debt consolidation loan: secured (against your property) and unsecured.

Homeowner loans (or secured loans) are tied to your property, which may enable you to borrow more at a lower interest rate. Be aware that your property could be repossessed if you fall behind with your repayments. However, this is usually a last resort.

Personal loans (or unsecured loans) aren’t tied to a property, so you don’t have to be a homeowner to apply.

Consider the pros and cons of each debt consolidation option carefully before applying.

Advantages of a debt consolidation loan:

• Multiple debts can be moved to one place – which may make it easier to budget.
• Lower interest rates may apply - compared to the rates on your current debts, depending on your eligibility.
• You could reduce your monthly repayments – if you spread the repayments over a longer time.
• Your credit rating should improve - as long as you make your monthly payments on time and in full.

Disadvantages of a debt consolidation loan:  

• Missed payments can have a negative impact on your credit score and you may be charged late fees.
• You might not be eligible to borrow enough to cover all your debts - if this is the case, you’ll still have debt in more than one place.
• Higher interest rates may apply – especially if you have bad credit. So, make sure you do your sums and shop around using eligibility checkers, before you apply.
• You could pay more interest overall – if you spread your new loan repayments over a longer timeframe.
• Early repayment charges may apply if you clear existing loans early. Your existing lender will be able to let you know.

2. Balance transfer credit card 

A balance transfer allows you to move money from multiple credit cards to a single credit card with a lower interest rate. Your eligibility will depend on your personal circumstances, such as your credit score and affordability.

Advantages of a balance transfer credit card:  

• One monthly repayment - having all your credit card debts in one place could be easier to manage than multiple card repayments.
• Your credit rating might improve - if you always pay on time. And only having one credit card might look better to other lenders.
• Some credit cards have 0% interest on balance transfers - these offers tend to be reserved for those with high credit scores.

Disadvantages of a balance transfer credit card:

• Balance transfer fees may apply – check with the lender.
• Your credit limit might not cover your debts - this means that the credit card you take out won’t let you consolidate all your debt
• 0% introductory rates only last for a fixed period – once it finishes the interest rate might be very high on any remaining balance. So, it’s best to pay it off before the deal ends.
• Your credit score might dip if you miss repayments on your credit card.

3. Remortgage with additional borrowing

Remortgaging means switching your current mortgage for a new one. You may wish to raise additional funds to consolidate existing unsecured debts at the same time.

Advantages of remortgaging:

• You might be able to get a better interest rate than you’re currently on.
• Mortgage rates tend to be lower than those found on unsecured debts (like credit cards and personal loans).
• You may be able to borrow more than with a personal loan or credit card. But remember to only borrow what you need, and what you can afford to repay.

Disadvantages of remortgaging:

• You’ll have a larger mortgage to pay if you borrow more against your house.
• You may increase the amount you repay in total if you extend the term. 
• Early repayment charges may apply to your existing mortgage.
• Your home could be put at risk if you fall behind on your repayments.

Our qualified advisers can discuss your situation to see whether this is a suitable option for you. Once you’ve completed our form, we can work towards an Agreement in Principle.

The final steps will include a full credit check, house valuation, and arranging for a solicitor to handle the mortgage transfer. These things are all taken care of by our experts.

What is the difference between a personal loan and a debt consolidation loan?

The only difference between a personal loan and an unsecured debt consolidation loan is the name, which refers to the purpose of the loan. Some lenders advertise personal loans as debt consolidation loans, as they can be used to consolidate outstanding credit.

What are the alternatives to debt consolidation? 

If taking out finance to consolidate debt doesn’t suit your individual circumstances, you could speak to your creditors or a debt charity to see if they can help. 

1. Dealing with your creditors directly 

Your creditors might be able to restructure your repayments to make them more manageable. Just remember that if you reduce your monthly repayments, it’ll take longer to pay back the money you owe. And it can affect your credit score, which can affect your chances of getting approved for credit in the future.

2. Contacting a debt charity 

If you’re struggling with debt, you could also get free, expert advice from Money Helper, Money Wellness, Citizens Advice, National Debtline or StepChange. We also suggest that you get in touch with your lenders to see if there is anything they can do to help.

3. Setting up a debt management plan 

A debt management plan could be an option if you’re struggling to make repayments. This is where you instruct a debt management company to liaise with your creditors, to arrange a reduced monthly payment plan.

Remember you’ll still have to pay the full amount, just spread over a longer period. Fees for this service may apply (unless you use a free debt charity like StepChange). Again, making reduced payments can affect your credit score.