Is debt consolidation a good idea?

Debt consolidation lets you bring several debts together into one.

That means you only have to make one payment to a single lender each month, rather than multiple payments to different lenders.

You can use debt consolidation to pay off non-priority debts, such as: 

• credit cards
• payday loans
• store cards
• personal loans
• overdrafts
• catalogues

Debt consolidation can take several forms, including: 

• taking out a new loan to pay off existing debts
• moving multiple credit card balances onto one card
• adding debts to your mortgage

• Easier to manage finances
• Lower monthly payments
• Clearer timeline
• Potential to reduce interest rates

• You could end up paying more overall
• You could be paying off debt for longer
• You may have to pay extra charges
• Your home could be at risk
• Your credit score could be harmed
• You could start to rely on debt

Let’s take a closer look at the benefits of debt consolidation in more detail.

Easier to manage finances

Each debt will have its own payment date, interest rates and terms.

So if you have several debts with multiple lenders, keeping up with them all can start to feel overwhelming and stressful.

By consolidating your debts, you can bring all these separate debts together into one single monthly payment to just one lender.

That can make staying on top of what you owe much easier and you’ll probably be less likely to miss payments.

This can, in turn, give you greater peace of mind and a sense of control over your finances.

Lower monthly payments

When you consolidate your debts, especially through a longer-term loan, you might find that your monthly payments go down.

This can ease immediate financial pressures, so you have more money available for essentials such as groceries, bills and rent.

But you should bear in the mind that if you’re paying less each month, you’re spreading the debt over a longer period.

And when you factor in the total cost of interest, you could end up paying more in the long run.

Clearer timeline

People with multiple debts often struggle because they can’t see a light at the end of the tunnel.

With so many repayment schedules to consider, paying off debts can feel like a never-ending task.

But debt consolidation can give you a clear end date for your repayments.

If you know exactly when you expect to be debt-free, you can feel like you’re making progress towards this goal and be able to plan ahead.

Potential to reduce interest rates

Many types of debt, such as credit cards, can come with high interest rates.

So if you consolidate them into a single payment, you could possibly get a lower interest rate, depending on your circumstances.

For example, some credit cards offer 0% balance transfers for a limited time.

That means you can put more of your money towards actually paying off the debt, rather than interest.

But this will depend on factors such as your credit score, and it’s important that you know what the interest rate will be once the introductory offer expires, as you could end up paying more.

Let’s look at the possible risks or downsides you should be aware of in more detail.

You could end up paying more overall

Although consolidating your debts into one monthly payment can make paying off your debt more affordable, you could end up paying back more in total.

That’s because the loan term could be extended, so even if you get a lower interest rate than what you’re paying right now, the longer repayment period means there’s more time for interest to build up.

So it’s really important that you look at the total cost of the loan, not just what you’re paying each month.

Paying off debt for longer

Being able to make a lower monthly payment after consolidating your debts can feel like a massive relief.

But if you’re making lower payments, it’ll take you longer to pay off the debt.

So with this option, you could conceivably still be making payments years down the line, which could stop you focusing on other financial priorities, such as saving for the future.

Extra charges

You might be charged fees to take out a new loan, transfer balances between credit cards or pay off existing debts early.

So if you’re thinking of consolidating your debts, it’s important that you think about the extra costs you may have to pay and read the small print before making any decisions.

Your home could be at risk

If you consolidate debts by adding them to your mortgage or taking out a secured loan, you risk losing your home if you can’t keep up with payments.

So even if you’re attracted by the prospect of lower interest rates, you should look at the bigger picture and think about how much risk you’re willing to take on.

Your credit score could be harmed

If you miss payments after consolidating your debt, your credit score could take a hit.

So you need to be certain that you’ll be able to keep up with the new repayments.

Even applying for new credit can temporarily lower your credit score, especially if you make several applications in a short time.

You could start to rely on debt

Consolidating debt might make managing what you owe easier, but it doesn’t tackle the root causes of why you got into debt in the first place.

It offers short-term relief, but it might not fix the underlying problem.

For example, you might be overspending or have a negative budget.

So once credit cards and loans have been cleared with debt consolidation, it’s important to close those accounts so you’re not tempted to use or rely on them in the future.

Debt consolidation could possibly work for you if:

• you have a steady income
• you’ll be able to keep up with repayments
• you don’t depend on credit day-to-day
• you haven’t missed any debt payments yet
• you have a good credit score

But it might not be the best option if: 

• you’re not certain you can keep up with payments
• you’re relying on credit to cover everyday costs
• you have a low credit score
• the new loan could cost you more in the long run
• you’ve struggled to manage debt in the past
• you’re at risk of falling into more borrowing

Ultimately, you want to get to a situation where you’re debt-free and able to move forward with confidence and certainty.

So instead of taking out a new loan, firstly speak to a debt adviser, as they can point towards other, more suitable debt solutions you haven’t considered, as well as help you learn how to budget.