When you’re considering combining debts you should get debt consolidation advice first. We discuss the details of consolidating debts and where you can get help and support for free before applying for a debt consolidation loan or making any other big moves.
All you need to know, complete with FAQ answers is right here!
How do I combine all debts into one payment?
It is possible to combine all your debts into one payment through a strategy known as debt consolidation. By merging your debts into one payment you can manage your finances easier and prevent any debts from getting bigger through underpayments or missed payments. There’s also an opportunity to save money, which is explained in this guide.
How does it work?
To consolidate debts you have to borrow more from a new lender – an amount to pay off all debts with existing lenders. Once this has been done, you now have one larger debt that is in one place. It can be achieved through various methods that have been explained below.
Methods of debt consolidation
There are four main methods of consolidating existing debts into one monthly repayment. We’ve explained each of them below:
- Debt consolidation loans
A debt consolidation loan is an unsecured personal loan available from most UK banks and online lenders. The loan is used specifically to repay multiple existing debts, such as credit cards, other loans, store cards and any other unsecured debt you may have. You’ll need to be approved for the debt consolidation loan, which means having your credit score checked.
You’ll need to access a debt consolidation loan large enough to pay off your other debts, but also a loan with a favourable interest. By taking out a new loan with a lower interest rate than the interest rates you’re paying now, you can lower your monthly repayments and save money.
Debt consolidation loan Vs personal loan
Debt consolidation loans are made for people wanting to combine their debts together, but you can usually do this with any generic personal loan as well. Some banks don’t advertise debt consolidation loans but do offer personal loans that can be used for this means. Always check the terms before you apply and make sure the lender is registered in England and Wales – and authorised and regulated by the Financial Conduct Authority.
- Balance transfer credit cards
If you were thinking about using a debt consolidation loan just to pay off credit card debts, there may be a more suitable option. A balance transfer card is a type of credit card used to consolidate other credit card debts only.
You simply transfer the balances to this new card once approved. You may be subject to a transfer fee of 1-3% of the amount transferred. Note that some generic cards will not allow you to transfer balances from other cards.
But the good news is you might not have to pay any interest for the first few months. The best deal on these cards usually come with a period of 0% interest. People who are not financially struggling also consolidate to these cards to access a better interest rate and save money.
- Remortgaging and second charge loans
Homeowners may choose debt consolidation by remortgaging their current property or taking out a secured second charge loan against their home. This works by releasing equity in the property as a lump sum payment, which can then be used to clear multiple debts.
It’s important to get professional mortgage support, as well as advice on debt consolidation before doing this. Your new secured loan will be larger and will likely take longer to pay back.
- Debt Management Plans
Another alternative to a debt consolidation loan is a Debt Management Plan (DMP). This is an agreement with multiple creditors for you to make one monthly payment, which is then split between them.
It technically isn’t debt consolidation because all debts still exist, yet, it still creates the benefit of only paying one monthly repayment. When you negotiate a DMP, you may be able to pay back less by letting them know you’re struggling to keep up, or you could ask for the interest rates to be reduced.
A word on debt management companies
A debt management company is a commercial business that provides paid-for services to people in debt. On many occasions, they offer to set up a DMP with your creditors on your behalf. However, this comes with an initial and ongoing fee.
They try to justify these by stating they will get a better repayment deal than you could on your own, but that’s not always true. Moreover, some of the advice charities listed later in this guide will provide an equivalent service for free!
What is the safest way to consolidate debt?
All debt consolidation methods are considered safe when they are suitable for your situation. To understand if you are suitable and this is right for you, you should get free debt advice from a UK registered charity. The charity may suggest alternative debt solutions that provide you with more benefits or even write off some of your debt.
However, the safest methods are debt consolidation loans, balance transfer cards and even DMPs. They are safer than remortgaging for debt consolidation because they are unsecured, while remortgaging is secured against your property and therefore creates greater risks.
DMPs do have some additional risks because it is an informal agreement and there is no law stopping creditors from changing their mind at any moment, even if it is unlikely.
Does debt consolidation give you bad credit?
Debt consolidation will affect your credit score in various ways depending on your chosen method of debt consolidation. For example, if you use a debt consolidation loan there will be a search of your credit score by the lender with no significant effect. But if you were to use a DMP, the creditors involved are within their right to record underpayments from what was originally agreed, even if they have agreed to the new plan.
In general, debt consolidation only gives you a bad credit score if you don’t keep up with monthly repayments in full and on time. This is less likely if you source debt consolidation free counselling first to have your situation assessed for a debt consolidation loan etc.
Can I get a consolidation loan with bad credit?
If you have a poor credit history, you will find it more difficult to access any type of credit until you manage to improve your score. There are some simple ways that could improve your score quickly, such as registering on the electoral role or looking for mistakes on your file.
You may still be able to get a consolidation loan if you have bad credit, but it’s likely that the APR rate you’re offered is higher than advertised. This could make it not worth consolidating with this loan or consolidating in general.
A DMP is a good alternative because your credit file will not be checked using this method as you are not taking out more credit.
Is consolidation the best way to deal with debt?
There is no way of saying for sure that debt consolidation and debt consolidation loans are the best way to deal with debt. This is because every debtor’s situation is entirely different, and the best method to become debt-free is based on multiple factors.
To know if debt consolidation is the most advantageous way to get out of debt, you should search for financial advice services. You might be able to work out if debt consolidation loans will save you money, but free debt advice charities can also discuss alternatives that may do even more.
A lot of the time it will depend on the interest you will be subject to on the loan or new credit card (after any 0% holiday period!). An online loan calculator will show what at least 51% of applicants received, but you could have to pay more, which might make consolidation a non-starter for you.
Where to get debt consolidation advice
Throughout this guide, we’ve stressed the importance of getting debt consolidation loan debt advice.
But where can you get it from?
We’re glad you asked. Here are the best places to get debt advice before applying for any debt consolidation loans:
#1: StepChange Debt Charity
The StepChange debt charity is a renowned charity working across the UK, previously named the Consumer Credit Counselling Service (CCCS). Their work revolves around helping people with money problems to get out of debt. You can contact StepChange over the phone or using their online chat function if preferred.
Their advisors are professional, knowledgeable and provide a personalised service. They will get to know your finances and debt situation in detail to assess if a debt consolidation loan is right for you. And they’ll suggest alternatives if they believe there is a better way.
#2: Money Helper
Money Helper has been known by a lot of different names over the recent years, including the Money Advice Service. They are a UK government backed group providing financial advice across topics from pensions to debt.
Their team works in a similar way to those at StepChange by getting to know your situation and offering solutions. They’ll explain if a debt consolidation loan is the best choice based on your situation and how to get it right. Get free advice by heading to their official website today.
#3: National Debtline
National Debtline is another stellar debt charity in the UK run by the Money Advice Trust. The charity has been going for over 25 years and has helped countless individuals get out of debts.
They are very similar to StepChange because all their work centres around helping debtors, unlike Money Helper that provide all types of financial support. You can call them for free and there is an online chat function as well.
Before you get in touch…
When you call one of these companies, their advisors will need to know about your current borrowing, repayments etc. You can save time by creating a monthly budget first. The charities listed above state on their website that they will need this to provide personalized services. Thus, it is worth making your budget before you get in touch.
We’ve created a budgeting guide for people who need help making a budget!
Have another consolidation query?
If you have a question about this debt management strategy that wasn’t answered above, we have probably covered it in one of our other Money Nerd guides. Search our site now to find more answers on consolidating debt FAQs!