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How to consolidate debt
It could make your finances easier to manage if everything is in one place.
Benefits of consolidating debt
If you have debt balances on things like credit cards, loans, overdrafts, car finance and store cards, you’ll have several monthly payments to manage. Your balances are also likely to be charged at different interest rates, making it difficult for you keep tabs on your borrowing costs.
With everything in one place, and one payment to manage each month, it could be easier to stay on top of your balance, avoid missed payments and additional fees or charges.
It’s just useful to know that, depending on the interest rate and how long it takes you to repay your consolidated balances, your overall borrowing costs could be higher.
All lending is subject to an assessment of your circumstances.
There are a few ways to consolidate debt, which we’ll cover below.
Options for consolidating debt
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If family or close friends are willing to lend you money, you could repay your debts, cut your borrowing costs and reduce the risk of negatively impacting your credit score.
In this situation:
- write an agreement, including the terms of the loan and your commitment to repay
- automate your repayments by setting up a regular standing order.
However, borrowing from family and friends is not an option for everyone, and there are risks.
- You could be tempted to borrow more, undermining any benefit of consolidating your debts in the first place.
- You put personal relationships at risk if you don’t repay what you borrow.
- Charges might apply when you settle debts early.
There are other borrowing options which might be more suitable.
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If you’re approved for a debt consolidation loan, the money will be sent to your nominated current account, so you can arrange to pay off your other balances. With some lenders, including Halifax, you might be able to arrange automated debt repayments as part of your loan application.
You could choose a loan repayment term of 1-7 years, giving you a target end date, after which your balance will be repaid in full, as long as you’ve made all of the required payments.
Before you apply, it’s important to think about:
- Which balances you’d you like to consolidate – that’ll help you decide on a loan amount. If you have balances on 0% interest, you might want to wait until promotional offers expire, before you refinance any remaining balances with a debt consolidation loan.
- Whether the loan you want to apply for is secured, e.g. against your home. Your belongings could be repossessed if you can’t keep up with repayments.
- Whether early repayment charges apply to debit balances you hold elsewhere. Your balance may not reflect these, so make sure you understand any costs, including any pending interest charges.
- Whether you’re eligible for credit, and what impact applying could have on your credit record and score. Some lenders offer a quotation service, helping you to understand your eligibility, without impacting your credit score.
If the interest rates are fixed your loan repayments will be too, making it easier to understand your borrowing costs and keep track.
If interest rates are variable, your loan repayments and borrowing costs could change over time.
Some lenders will allow you to make overpayments on loans, potentially reducing your overall loan term and borrowing costs. Just be aware that early repayment charges might apply.
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With a balance transfer, you could move credit and some store card balances to a single credit card, making your outgoings easier to manage. By transferring higher interest rate balances, you could also save on borrowing costs. Just be aware, transfer handling fees might apply.
Some credit cards also give you the option to make a money transfer, moving funds from your credit card to your UK current account. This could be useful when you need to manage cash-only purchases, unexpected bills, or to pay off debts you can’t consolidate with a balance transfer, including selected store card or loan balances.
Just be aware that a transfer fee may apply, and purchases made using cash, debit card or bank transfer aren’t covered by Section 75 of the Consumer Credit Act 1974.
An introductory or promotional rate could offer low or even 0% interest on transfers for a set time. To limit your borrowing costs, try to repay your balances before any offers expire, after which the standard interest rates apply instead. If you miss a payment or go over your agreed credit limit, you could lose any promotional or introductory interest rates, so it’s important to manage your credit card account carefully.
Before you apply, it’s important to think about:
- The credit limit you’d need to consolidate your debit balances.
- Whether early repayment charges will apply to balances you hold elsewhere.
- Whether you’re eligible for credit, and what impact applying could have on your credit record and score. Some lenders offer credit check tools, helping you to understand your eligibility, without affecting your credit score.
Unless a 0% interest rate applies to purchases, to avoid paying interest on purchases, you need to pay off your statement balance in full and on time every month, including any transferred balances.
Unlike a personal loan, there’s less structure around credit card payments, which could make it harder to budget, especially if you use your card to make other transactions in future.
However, you can repay as much as you want when you’re able to, or as little as the minimum payment each month. It’s just important to know, if you only pay the minimum, it’ll take longer and cost more to clear your credit card balance. You could even fall into persistent debt.
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You might be able to borrow more on your existing mortgage, or remortgage with a new lender, giving you the money you need to consolidate your debts.
This could depend on:
- your age and whether you’d be extending your mortgage into retirement
- whether your lender will let you add to your mortgage for this reason
- your personal circumstances and the health of your credit record
- whether you can afford additional repayments
- how close you are to paying off your mortgage
- the loan to value ratio for your property.
Because your mortgage is secured against your home, it may be repossessed if you don’t keep up with your repayments. That in itself may be a reason to choose an alternative borrowing option.
Unsecured debts, like credit cards or personal loans, often have higher interest rates, compared with secured loans, like mortgages.
However, over a long period, your borrowing costs could really mount up, even at a low interest rate. The typical mortgage term is 25 years but, in the UK, you might be able to get a mortgage for anything from 6 months to 40 years.
To limit your costs, you should only borrow what you can reasonably afford to repay, over the shortest possible term. Another borrowing option could be cheaper over a shorter term, even if the interest rate is higher.
You must seek support from a mortgage adviser before you apply to borrow more or change your mortgage in order to consolidate debts. You should explore all financing options to find the one which suits your individual circumstances.
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Usually only available to homeowners over the age of 55, you might be able to release tax-free cash from your home, helping you to live more comfortably while staying in your own home.
This generally takes the form of a loan, secured against your house. You won’t have to pay anything until you pass away, or move out of your home into long-term care.
Before deciding on whether equity release is right for you, you should speak to a qualified adviser. They’ll be able to explain what’s involved and tell you about other options. We can put you in touch with a Scottish Widows Later Life Lending Adviser, or you can find a qualified adviser through MoneyHelper and the Equity Release Council.
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If you’re over the age of 55 (rising to 57 from 6 April 2028) and have been paying into a pension, you might be able to access a tax-free lump sum from your fund, using that to pay-off debts. It’s important to consider the future impact of this though, as it could leave you with less income when you are older.
We recommend speaking to a fully qualified pensions adviser, regulated by the Financial Conduct Authority, before deciding whether taking funds from your pension is the right thing to do.
Where can I go to get guidance or financial advice about my benefit options?
Impartial guidance:
Pension Wise from MoneyHelper is the Government’s free guidance service. They offer personalised guidance about available options and tax implications. You can find further information about the help they offer, or make an appointment with them, by going online at www.moneyhelper.org.uk/pensions
Impartial and independent financial advice:
For advice that is personalised to your own circumstances, you can speak to a financial adviser. They’ll normally charge you for any advice they give. If you don’t have a financial adviser, you can visit www.unbiased.co.uk or www.vouchedfor.co.uk to find one near you.
Tips for managing consolidated debt
- It’s important to make payments on time to avoid extra fees and charges, losing any introductory or promotional interest rates, and to limit any negative impact on your credit score and record.
- Repay as much as you can, wherever possible, to reduce your balance and the amount of any interest you pay overall. This could also stop you falling into persistent debt.
- The aim is to consolidate and pay off your debts. Try not to get into further debt if you can help it.
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