You’ve might have heard debt consolidation described as “rolling up all of your debts into one payment”, and that’s pretty much the gist of it.

Instead of paying back smaller amounts to lots of different providers, debt consolidation works by taking all of the money you owe and combining it into one single debt. That way, you only make one monthly repayment and that works towards clearing all of your debt.

And while it’s a great way of making things more manageable — keeping track of multiple repayment dates every month can get a little overwhelming — debt consolidation loans can also be a good way of cutting down the interest you’re paying so you can clear your debts a little faster.

And because there’s a lot to consider before you roll up your debts into one payment, we thought we’d take some time to answer some of the most common questions we get asked about debt consolidation.

What is debt consolidation?

We touched on this before, but if you’re making payments towards credit cards, loans and overdrafts every month, it can be pricey and overwhelming. Debt consolidation lets you make your debt manageable and — usually — cheaper too.

Here’s a quick video we’ve put together that breaks everything down for you.

As with any form of borrowing though, debt consolidation isn’t right for everybody. It’s important to make sure you’ve considered the pros and cons before you make a decision.

A debt consolidation loan might be right for you if:

You’re looking to lower the interest rates on your debt: if the interest rates on your current debt are quite high, then you can usually save money by rolling it all into a debt consolidation loan.

You struggle to stay on top of different payment dates: car finance comes out the 3rd, loan repayment is on the 10th, credit card on the 25th… it gets confusing, right? A debt consolidation loan lets you roll lots of those monthly charges into one payment that comes out on the same day every month.

In fact, last year we spoke to Andrew about how using a debt consolidation loan to roll up all of his payments helped him stay on top of his repayments and save £800 a month.

However, debt consolidation may not be right for you if:

You’ve already got good rates on your existing debt: let’s say you’ve already got a low-interest loan and decent rates on your credit cards. In that case, you might find that a debt consolidation loan would work out more expensive in the long run than simply continuing with your monthly payments.

You can transfer your credit card debt to a 0% offer: if your credit score is healthy enough, you might be able to transfer your existing credit card debt onto a 0% credit card and put all of your payments towards clearing your debt, without worrying about interest.

Our super handy debt consolidation calculator can help you work out whether you’d save money with a debt consolidation loan, or whether you’re better sticking to your current plan.

What are the different types of debt consolidation?

As with most loans, there are two types of debt consolidation loan: secured and unsecured. And, of course, each type comes with its own pros and cons.

Unsecured Secured
Pros  Faster application process
No need to be a homeowner
Better rates
Larger loan amounts
Cons  Smaller loan amounts
Not always suitable for people with poor credit scores
Need to use your house or property as collateral
Slower application process

In general, secured loans help you borrow more money or secure better rates, but they involve using your property as collateral. Unsecured loans let you borrow less (often at slightly higher rates) but don’t require you to be a homeowner.

Is debt consolidation a good idea?

This is a complicated question. It depends.

For some people, debt consolidation can be a good way to clear their debts and become debt-free faster, but others can end up paying off more money in the long run.

Before you apply for a debt consolidation loan, make sure you’re able to make the monthly repayments, even if your circumstances change. (Plan for things like sudden illness or losing your job.) It’s also worth using a debt consolidation calculator to be doubly sure that taking out a new loan will save you money.

However, if you’re in serious debt, for example, using credit cards to pay for things like household bills, then taking out a debt consolidation loan might not be the best path to take.

We’d advise you getting free and independent financial advice from StepChange, an independent charity that specialises in helping people get out of debt. They can help by speaking to your creditors and can offer advice on setting up a debt repayment plan.

How much does a debt consolidation loan cost?

It’s not easy to give a straight answer to this. The cost of your loan will depend on a number of factors, from how much you want to borrow to your credit score to whether you’re applying for a secured or unsecured loan.

However, before you apply for a loan, it’s important to consider:

● The APR (annual percentage rate) of the loan vs the APR of your monthly repayments
● Whether there are any charges for late or missed payments
● How long you’ll be borrowing the money for
● Whether there are any fees for paying the loan off early
● Whether you have to pay a fee for applying for the loan

What are the alternatives to a debt consolidation loan?

While debt consolidation loans are a popular way of getting on top of your finances, they’re not the only option.

A 0% balance transfer card

If you can transfer the balance of your credit cards onto a single 0% credit card, you’ll be able to take advantage of not paying any interest on the debt during your interest-free period. This means you can focus on paying back the debt itself which should mean you can pay it off quicker.

However, these cards are generally only available to those with a good credit score, with the market-leading cards only available to those with an excellent score. Also, be careful with the 0% terms, after your initial, introductory 0% period, it’s not uncommon to see your interest rate spike.

Speak to your lenders and credit card providers

If you’re struggling to make your current repayments, your lender may be able to offer some assistance if you call them and speak to them. Of course, it’s entirely at the lender’s discretion, but they may be willing to lower your minimum monthly payments to help you avoid missing a payment.

How can I take out a debt consolidation loan?

Applying for a debt consolidation loan can seem like a big step, but it’s relatively straightforward.

Step One: make sure it’s the right decision

Speak to your partner, use our debt consolidation calculator, count on your fingers… just make sure that a debt consolidation loan is the right move for you.

Step Two: work out how much you need to borrow

Total up how much is left to pay on all of your outstanding debt. That’s how much you’ll need to borrow.

Step Three: find a loan that works for you

You’ve got two options here:

1. Fly solo: speak to lenders and use comparison sites to find the best rate for the amount you need to borrow, then complete the application online.
2. Speak to a broker: brokers often charge a fee, but they do all of the hard work for you, finding you the best deals (often better than the deals available online) and making sure everything happens quickly and smoothly.

(Some brokers — like us, hey! — even pay for any valuation fees you might have to pay when you apply for a secured loan.)

Step Four: pay off your debts

Once you’ve found a loan that works for you and your circumstances, all that’s left to do is get the paperwork signed, wait for the money to land in your account and then pay off your existing debts, replacing them with one, manageable monthly payment.

Thinking about consolidating your debt? Use our super-simple, super-handy debt consolidation calculator to see how much you’d need to borrow and how much you could save by rolling everything up into one loan.

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