What is debt consolidation?

One strategy to help you manage your debts with multiple lenders is to consolidate it all under one form of credit. This can have several benefits for the right borrower, but could another debt repayment strategy work for you?  

Below we’ve explained what debt consolidation is and who it might benefit.

Debt consolidation is a debt repayment strategy in which you take out a single form of credit to pay off all your existing debts. So, instead of having to pay several debts under several interest rates, you’ll only repay one lender under a single borrowing cost.

This can work out cheaper for some individuals, especially if the interest rate on their form of debt consolidation is cheaper than their existing borrowings.

There are several different forms of credit you can use to consolidate debt. Popular options include unsecured and secured loans, but you could also consider a 0% balance transfer card too. Below we’ve explained some of these forms of credit in more detail:

A personal loan is a form of unsecured lending, which means that if you fail to make repayments your assets won’t be used as collateral.

Otherwise known in this context as a debt consolidation loan, this form of lending will require you to adhere to a fixed interest rate and repayment plan. The benefit of this is that you’ll know how much your interest will cost and how much you’ll repay each month.

To find some of the best loan rates on the market, visit our personal loans chart.

While not a traditional form of credit, equity release can be used by those aged 55 and over to consolidate their debts. This could be of interest if you’re struggling to secure a loan due to your age.  

Put simply, equity release allows you to borrow money tied up in your home. Typically, a lender will provide you with an agreed upon sum and charge you a rate of interest. Some equity release plans require you to make interest payments but many roll-up the interest so it is repaid at the end of the plan. Once you die or move into long-term care, your repayments will stop and the initial borrowed capital plus interest will be repaid by selling your home.

Equity release is not a decision to be taken lightly, especially if you’re considering using the money to consolidate debt. If you are exploring this option, we strongly encourage you to seek independent financial advice.

Equity release is not a decision to be taken lightly, especially if you’re considering using the money to consolidate debt. If you are exploring this option, we strongly encourage you to seek independent financial advice.

If you’re struggling to find a personal loan, you could consider a secured loan to consolidate your debt. The difference between this and an unsecured loan is that a secured loan will use your assets, such as your home, as collateral if you fail to make repayments.

There are several reasons for choosing a secured loan over an unsecured. Perhaps you’re looking for a lower interest rate, you’d like to borrow a large sum of money, or your credit score is not sufficient for a personal loan.

To find some of the best secured loan rates on the market for you, visit our charts.

For credit card debt only, you could use a balance transfer card.

This type of borrowing is designed to act like a debt consolidation loan for credit cards. It allows you to move existing credit card debts all under one account. The benefit of this is that if you find a balance transfer card with a 0% introductory rate then you don’t need to pay any interest on your debt for this period.

However, a balance transfer card doesn’t come with a fixed repayment plan, so you’ll need to have the self-discipline to keep up with your repayments each month. You should always make at least the minimum repayment each month or risk seeing your credit score damaged.

To find the best 0% balance transfer cards, visit our charts.

If you have overdraft debt or would like a cash lump sum to consolidate your debts, then you may want to consider a money transfer card. While a balance transfer card will service your existing credit card debts, a money transfer card will deposit your lending into your current account. From here you can use the money to pay off your overdraft or other debts.

If you do use this form of credit, you should consider looking for a deal with a 0% introductory period.

More detail on the pros and cons of this type of credit can be found in our guide.

Generally, applying for some form of credit to consolidate debt can temporarily reduce your credit score. This is because requesting a new form of credit will require a hard search on your credit history, which has been known to force your score to drop.

Also, by paying off your lenders and closing your accounts, like a credit card or store card, you could reduce your overall credit limit. Once this happens you may find that you’re using a much higher percentage of this limit, which can have a negative effect on your credit score.

It’s important to stress that this initial drop can be temporary. As long as you make consistent repayments in full to your new, sole lender then your credit score will begin to rise.

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While you won’t have access to an array of options compared to someone with a better credit score, there are still debt consolidation options on the market for those with bad credit.

If you are a homeowner, you may want to start with finding the best secured loan rates on the market, as these can be easier to obtain than personal loans.

Remember, if you get declined for credit, don’t keep reapplying within a short space of time. Being declined for credit can reduce your credit score and hamper your chances of getting approved for other forms of borrowing in the future. Instead, take stock of your credit score and find a lender with a pre-approved eligibility checker before applying. Doing so will give you an idea of your chances of being accepted for your chosen form of borrowing, without damaging your credit score.

Using debt consolidation can be a good strategy, depending on your circumstances.

If you find the right form of debt consolidation to reduce your regular repayments and overall interest rate it can be the cheapest way to repay your debt. It has the added benefit of making it easier to keep track of your debt.

However, if it makes your debt more expensive overall it might be worth considering other debt repayment strategies, such as the snowball method or debt avalanche.

To work out the true cost of your debt consolidation strategy, remember to consider one-off fees in addition to your interest rate. These are often included in balance transfer, money transfer and some loan options. Once you take these into account you might be surprised to see how much your borrowing will cost in total.