What is debt consolidation?
Debt consolidation combines multiple debts into one loan. Instead of making repayments to several lenders, you'll make one fixed monthly repayment over an agreed term. Debt consolidation is commonly used for unsecured debts such as credit cards, personal loans, store cards and overdrafts. It can simplify budgeting and make borrowing easier to manage.
How do debt consolidation loans work?
A debt consolidation loan provides enough money to repay eligible existing debts. Once those debts have been cleared, you'll repay a single loan through fixed monthly repayments.
At Norwich Trust, we'll carry out an affordability assessment to make sure any loan offered is suitable for your circumstances. In some cases, we may pay existing lenders directly.
Is debt consolidation right for me?
Debt consolidation may help you:
• Combine multiple debts into one repayment.
• Simplify budgeting.
• Gain better visibility of your finances.
• Potentially reduce borrowing costs
depending on the loan terms. Before applying, consider the total amount repayable as a longer repayment term could increase the total interest paid. Making the most of debt consolidation To get the most from a debt consolidation loan, avoid building up new debt on accounts that have been repaid.
Creating a realistic budget and making repayments on time can help improve your financial wellbeing.
Making the most of a debt consolidation loan
If you choose debt consolidation, it's important to avoid building up new debt on accounts that have been repaid.
Where appropriate, consider closing cleared credit cards, store cards or overdraft facilities. Creating a realistic budget and making repayments on time can help improve your financial wellbeing and keep you on track towards your financial goals.
Interest rates: For someone with several high-cost debts, a consolidation loan with a lower interest rate would mean more of their payments go towards reducing the loan balance rather than on interest and could mean that the debt is repaid more quickly.
Repayments: One of the advantages of debt consolidation is having fewer repayments. Those with multiple debts across different lenders are often juggling different due dates and interest rates. Replacing these with a single repayment can make it much easier to keep on top of repayments.
Low existing rates or promotional rates: If your current debts have a low interest rate or you’re within an interest-free period, consolidating those debts using an item of credit with a higher interest rate could cost you more.
Longer term: Debt consolidation can simplify repayments, but it may also increase the time it takes to become debt-free. If you choose a longer loan term than you have left on the items you are consolidating to lower your monthly repayments, you are likely to pay more in interest over time.
Credit history: Debt consolidation usually means applying for a new card or loan. If you have a poor credit rating due to missed payments, defaults or CCJs you might find it difficult to apply for new credit items, especially ones with lower rates.
Debt consolidation can be a useful way to simplify your finances, but it isn't suitable for everyone. Before applying, consider your budget, the total cost of borrowing and whether the loan will genuinely improve your financial situation. If you're unsure, seeking free independent debt advice may help you understand all of the options available.
Consolidating debts requires you to take on more debt, even if it’s temporary. Each person’s situation is unique so if you are struggling with debt, it may be beneficial to seek advice to truly understand if debt consolidation could help you. You can access free independent financial advice by contacting PayPlan or your local Citizen’s Advice Bureau. Both employ qualified debt advisors who will be able to thoroughly assess your financial situation and help you find the best way to tackle your debts.
You can also find lots of useful help and guidance about everyday money and dealing with debt on the government’s Money Helper website.
Debt consolidation doesn't automatically improve your credit score. However, making repayments on time and reducing outstanding balances may have a positive impact over time. Missing repayments or taking on additional borrowing could have the opposite effect.