Keeping track of your credit card, overdraft, Klarna balance and what you owe to Wayfair is both exhausting and deceivingly expensive. Each creditor has their own interest rates and expects payments on different dates. For an ordinary person, it becomes business-like and we have far better things to do than worry about this admin.
A debt consolidation loan lets you combine multiple debts into one manageable monthly payment, sometimes at a lower rate than your existing debts. The main idea is simplifying your finances, not offering a quick fix. This guide will help you decide if it is right for you.
What Is a Debt Consolidation Loan?
A debt consolidation loan is a way to turn many different debts into a single borrowing product. You essentially borrow enough to clear all short-term unsecured debts (so, not the mortgage) and this leaves you with just one lender and one monthly payment. One of the main benefits is simply reducing your risk of forgetting to make a payment, which hurts your credit score and can result in late interest or missed payment fees.
There are usually two versions of a consolidation loan:
- Unsecured personal loans based on your creditworthiness
- Secured loans backed by your property
The appeal of them is quite straightforward: instead of juggling different creditors, each with their own interest rates and payment dates, you now focus on making one fixed monthly payment. Consolidation is one of many debt management strategies around.
When Should You Use a Debt Consolidation Loan?
In the UK, consolidating debt is not always in your best interest (though, if the numbers are close enough, the administrative benefit can still make it worthwhile for some) – so is a debt consolidation loan ever a good idea?
If you have balances on credit cards that charge 20-30% APR, but your credit score qualifies you for a personal loan at 10%, you will likely save substantially on interest. The key is to weigh your current rates according to how big the debts are.
Missed payments are another clear indicator that you are going to benefit. Tracking six different due dates is not viable for some people. And, if it is taking a toll on your mental health, this should also be a consideration. One payment date improves payment discipline.
On the other hand, if you haven’t missed a single repayment, having more accounts with good credit history on your credit file may have led to an improvement in your credit score.
It is also important to remember that debt consolidation usually only works if you maintain (or ideally, increase) your total monthly debt payments. Getting a consolidation loan so you can pay less each month will just stretch out the pain and lead to more total interest paid.
When Debt Consolidation Is Not the Answer
Consolidation can sometimes worsen a situation when used inappropriately. If the new monthly payment still strains your budget, you haven't really solved anything, but just changed your lenders. Run the numbers honestly before committing.
Longer loan terms are particularly deceptive as spreading repayments over seven years instead of three does reduce monthly payments, but it can mean paying thousands more in total interest. Always calculate the full cost and also address the underlying spending habits that led you here in the first place.
Making Your Decision
Add up what you will pay in total interest on the current debts compared to the consolidation loan, including any early repayment charges and arrangement fees. If consolidation costs a similar amount, it might still be the right move for your mental health and help you if you sometimes forget to pay.
Debt consolidation works best for those committed to breaking the debt cycle, not just rearranging it.
