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Money, tax and benefits
Consolidating debts
Consolidating debt is when you take out a single, new loan to pay off several existing debts. This can be a good way of taking control of your finances but you need to be careful. A consolidation loan may not always be your best option.
Before considering a consolidation loan
Before you decide on a consolidation loan, find out what's on offer and what alternatives you've got. These could include:
- trying to make new arrangements with your existing lenders
- checking that you're making the best use of credit options you've already got - such as an overdraft facility, credit or store cards, a personal loan or extension to your mortgage
- borrowing from relatives
You could also take advantage of the free advice that's available from debt counselling services such as National Debtline. (See 'Where to get help and advice' below.)
If you do decide to take out a consolidation loan, shop around for the best terms from a reputable lender. Building societies and banks may be able to offer you a personal loan.
Reasons to consider a consolidation loan
Used carefully, a consolidation loan can help to put you back in control of your finances. The advantages can include:
- you can use it to pay off your priority debts (for more about priority debts, see the link 'Which debts to pay off first' below)
- you could pay a lower rate of interest - interest rates for borrowing money for a short while are usually very high (consolidation loans are longer term and may be better value than short-term borrowing)
- your monthly payments might be lower
- you know when you'll finish paying off the debt
- you'll only have to make a single payment each month
- you'll only deal with one lender
- you may avoid falling behind on payments and getting a bad credit rating
Possible disadvantages of consolidation loans
Remember that there are some drawbacks too, such as:
- you could end up paying more overall and over a longer period
- you'll usually pay extra charges for setting up and repaying the new loan
- if the loans you're consolidating had the interest added at the start, you'll be paying interest on that interest - as well as on the amount you borrowed
- all your eggs will be in one basket - if you get into difficulties, it may be more difficult to come to a new arrangement with a single lender
- if the loan is secured against your home your property will be at risk if you can't keep up payments
How to choose a consolidation loan
Always shop around for the best terms - it'll save you money. Make sure you understand all the terms and conditions of the loan, such as:
- how long you'll be making repayments and how much you'll pay back altogether
- the interest rate and whether it can change
- what the monthly repayments are and what happens if you miss one
- any penalties or costs you'll have to pay if you want to repay it early
- what happens if it's secured on your home and you can't keep up the repayments
Once you've arranged the loan, aim to keep your finances under tight control - for example, cut up you credit cards and don't let the debt build up again. Be aware that the lender may put pressure on you to borrow more by extending the loan.
You'll be encouraged to take out insurance with your loan. Make sure you're clear about the terms, that you really need it and that you'll be able to claim on it if you need to.
Where to get help and advice
You can get free, independent advice on debt problems from a number of counselling services. It's always best to use these before using a commercial service.
National Debtline
National Debtline offers free, confidential and independent help over the phone for people in England, Scotland and Wales. You can call their helpline on 0808 8084 000 between 9.00 am and 9.00 pm from Monday to Friday and from 9.30 am to 1.00 pm on Saturdays (24 hour voicemail). You can also email them.
Citizens Advice Bureau (CAB)
Your local CAB provides free information and advice on legal, financial and other problems. You can find your local CAB in the phone book or on the CAB website.
Consumer Credit Counselling Service (CCCS)
The CCCS has a helpline providing free and impartial advice to people with debt problems. You can call their helpline on 0800 1381 111 between 8.00 am and 8.00 pm from Monday to Friday. You can also write to them.
