Consolidating debts

Consolidating your debts means that you get one single loan to pay off all or some of your other debts. A consolidation loan can be an unsecured personal loan. However, if you are a homeowner, it may be secured against your home.

Alternatives to consolidating your debts

If you are having problems making ends meet and are unable to pay your current bills, get professional debt advice to help you deal with your creditors and lenders. There are many ways to resolve debt problems and many free sources of help and advice.

Before deciding to consolidate your debts, you should look at what other options may be available to you. Alternatives to consolidating your debts could include:

  • better budgeting – use Shelter's budgeting advice to help
  • making new arrangements with your existing creditors, such as negotiating reduced loan rates
  • checking your existing loans, credit cards and overdraft facilities to see if you are getting the best rate from each – can you switch products?
  • looking at ways to increase your income or reduce your spending
  • borrowing money from friends or relatives

Find out more from Money Saving Expert about ways to boost your income.

Advantages to consolidating your debts

As long as you can afford the repayments for the full period of the consolidation loan, there may be advantages to consolidating your debts into one loan.

You could:

  • benefit from a lower rate of interest
  • reduce your overall monthly repayments to an affordable level
  • find it easier to make one regular repayment (if you repay all your other debts)

Get advice if you think major changes are likely, or that repaying a consolidation loan may become unaffordable, for example if you lose your job or have a child.

Contact Citizens Advice for more information.

Disadvantages of consolidation loans

Consolidation loans often carry major risks and may not be your best option, particularly if you are struggling with debt.

A consolidation loan secured against your property is like having a second mortgage. You could lose your home if you miss repayments.

Other possible disadvantages include:

  • making repayments over a much longer period of time and possibly paying more in the long run
  • paying extra charges when paying off your loans and arranging others, adding to your total debt
  • paying more by using a loan that charges interest to repay household bills – for example, it will be cheaper to pay off gas arrears in instalments than to get a loan to repay them

Your new loan provider may also have stricter rules on what happens if you miss payments in the future.

Contact an independent debt adviser to get advice on all your options.

Problems with paying a consolidation loan

If your consolidation loan is an unsecured loan, it is classified as a non-priority debt. If you don't pay, you can be taken to court and risk having a county court judgement against you.

You could be putting your home at risk of repossession if you consolidate your loan into a secured loan and then find you can't pay.

More advice and information

Get advice on dealing with debt from StepChange Debt Charity.

Find out more from the Money Advice Service about debt consolidation loans.

Last updated 01 Jan 2015 | © Shelter

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