How much will debt consolidation cost and will it save me money? 

These are questions that scores of people with multiple debts ask. And we’re here to provide answers before you decide to borrow again. 

Stick with us as we explain the fees and charges associated with consolidating your debts, either with an unsecured debt consolidation loan, or a balance transfer credit card. And remember that free debt advice is always available for UK residents. 

consolidate debt

What is debt consolidation?

Debt consolidation is when a debtor with multiple debts pays some or all of them off by taking out new credit. By paying them off with new credit they are essentially moving all of their existing debt into one new and bigger debt. Two of the most common ways of doing this is through a dedicated debt consolidation loan or a specialised credit card used to pay off multiple other credit cards. 

With only one debt, it is anticipated that managing your finances and keeping up with the single monthly repayment, or fewer repayments, is easier. And this may prevent debts from growing. 

Find your best debt solution

This 4 question debt calculator will tell you if you’re eligible.

What is the total amount of your debt?

Does consolidating debt save money?

Debt consolidation is used to save the debtor money. Although having one or fewer debts makes managing repayments less stressful, saving money is the overarching goal

Debt consolidation loans work best when the new interest is lower than the amount of interest the debtor was previously paying across the debts they consolidate. If the personal loan requires the debtor to pay more interest, it is usually not worth doing so. 

However, there may be fees and charges besides the interest rates offered. These need to be considered when making a decision. 

How much does consolidating debt cost?

The cost of consolidating debt using a loan or credit card may include more than the interest rates offered, which can differ from person to person. You will need to look out for additional fees and charges when searching the market and when using an online loan calculator. However, these only tend to apply when using a credit card to pay off other credit cards. 

Other costs that you may be subject to are early repayment fees. Some lenders will charge you to repay your loan earlier than planned. Make sure to check your credit agreement and factor any early payment charges into your decision.If you use a financial service provider to help you consolidate, they will charge their own fees.

Further details on the cost of specific methods of debt consolidation are discussed below!

Debt consolidation loans

Debt consolidation loans are usually a type of unsecured loan used to consolidate existing loans and other debts. However, you can get a secured debt consolidation loan in the event you remortgage to release equity from your property to clear other ongoing debts. This is risky as you could lose your home. 

Are consolidation loans expensive?

Debt consolidation loans are known to be slightly more expensive than other types of unsecured loans – but not exclusively. You can still find debt consolidation loans with more lucrative monthly payment terms than other loan providers and credit card issuers. If you couldn’t, then debt consolidation wouldn’t have become such a popular debt mitigation strategy. The most important thing is that they are cheaper than what you currently have to pay back each month. 

You can avoid paying for really expensive consolidation loans and online scammers by only considering legal loan providers that are authorised and regulated by the Financial Conduct Authority. 

Fees and charges for debt consolidation loans

The fees to look out for on a debt consolidation loan are the interest rates. A representative interest rate will be advertised, which can be useful, but the rate you receive could be different. At the time of writing, the average interest rate on a debt consolidation loan is around 23%. 

There aren’t usually any additional fees and charges to pay when you take out a debt consolidation loan. But remember that you might have to pay fees for paying off your debts early

When should you consider a debt consolidation loan?

You could consider using a debt consolidation loan if it will lower your monthly repayments. 

To know if this is the case, you will be required to meticulously compare the rate offered to you against what you pay back on ongoing debts. 

You should only borrow if it will lower your monthly debt repayments or possibly if it is equal to what you currently pay. Going ahead when you’ll end up paying back the same is still worthwhile because it streamlines your debts and makes staying on top of your financial situation. 

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Can I get a consolidation loan with poor credit?

You might still be approved for a loan to consolidate debt with poor credit, although the APR may be higher than someone with a good credit score has to pay. 

Some lenders even provide these types of loans for people with an unsatisfactory credit rating. You should check your credit score before applying to look for any mistakes that could cause your application to be rejected. 

Balance transfer credit card fees

The costs of debt consolidation are a little more complex when it comes to paying off multiple existing cards with a new credit card. 

First, you need to use a special type of credit card to do this. They often come with an initial period of 0% APR, giving you some breathing space of lower monthly payments without fees. But be aware of much higher rates after this welcome period. 

These cards more often than not come with a transfer fee. The average is around 3%. This is the percentage of all the money you transfer to the card which is paid to the new card issuer. 

For example, if you transfer a total of £10,000 of credit card debt to the new card with a transfer fee of 3%, you’ll pay a fee of £30. 

Debt consolidation FAQs answered at Money Nerd! 

It’s important to take advantage of free debt advice from a UK debt advice charity. Not only will they assess your situation to see if you could save money by consolidating, but they’ll also help you through the process. The best free debt advice charities include Step Change UK and National Debtline. 

And don’t forget that more information on debt consolidation is available on our website. Whoever you owe money to, our guides are designed to put you at ease and equip you with loopholes and legal rights. 

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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