Paying off several debts at once
Many people owe money in more than one place, such as a credit card, a loan and an overdraft.
Debt consolidation is one way of bringing those payments together. This page explains how it works and what to check. It also covers the free help that can look at every option with you.
What debt consolidation means
Debt consolidation means taking out new credit and using it to pay off your existing debts in full. Usually the new credit is a consolidation loan. You then make one payment each month, to the new lender.
The debts do not disappear. They become one new agreement, with its own terms. There may be new charges too, such as an arrangement fee or a fee for paying early.
When it helps, and when it can make things worse
A consolidation loan can lower the amount you pay each month. One payment can also be easier to keep track of than several.
A lower monthly payment often means paying for longer. Over the whole term, the new loan can cost more than the debts it replaced.
National Debtline says that taking out more credit is not usually a good option for people who are struggling to pay essential bills. The same goes for people who are already missing payments.
What to check before you borrow
- Look at the total cost of the loan, as well as the monthly payment. If you miss payments, the lender could ask you to repay the whole loan, including interest.
- Look at the APR. It is generally higher than the quoted interest rate and shows the true cost of the credit.
- Find out whether the loan is secured on your home. A secured loan becomes a second mortgage, and your home could be repossessed if you cannot keep up.
- Think before applying to several lenders. Each application shows as a search on your credit file, and lots of searches can make borrowing harder.
- Check that the lender is authorised by the Financial Conduct Authority (FCA). Anyone lending without that is lending illegally.
For credit card debts, some people move the balance to a card with a lower or 0% rate instead. This is called a balance transfer. There is often a fee, and most 0% deals last only a set number of months.
There is no government consolidation scheme
StepChange, the debt charity, says there is no government-backed debt consolidation scheme. Some companies use wording like that to make a service look free or official.
There are official ways of dealing with debt. They work differently, and a debt adviser can explain them.
Ways to deal with debts without borrowing more
A Debt Management Plan is an agreement with your creditors to pay your debts in smaller amounts you can afford. It covers unsecured debts only. Creditors do not have to agree to it. Some providers charge a fee, and charities such as StepChange run plans without one.
In England and Wales, the Breathing Space scheme can protect you from creditors for up to 60 days while you get advice. During that time, creditors cannot add interest or charges or take enforcement action. You apply through a debt adviser.
A Debt Relief Order is for people in England and Wales who cannot pay their debts. It is for people who owe less than £50,000, have less than £75 a month spare and have less than £2,000 in assets. Other conditions apply. You apply through an approved debt adviser.
In Scotland, people can arrange a Debt Payment Programme through the Debt Arrangement Scheme.
Free, impartial debt advice
A debt adviser can look at your whole situation before you decide anything. StepChange and National Debtline are charities, and both give free, confidential debt advice. Citizens Advice can help as well.