What is debt consolidation?

Debt consolidation is a way to combine several debts into one single item of credit. This can be useful for people with multiple debts with different lenders who want to simplify their finances and make one monthly repayment over a fixed term at one interest rate, rather than several payments, over different terms and all at different interest rates. This type of solution can help those who may be struggling with their finances and want  something more manageable. It can also help those wanting to clear their debts more quickly and reduce the total amount of interest they are charged, though the monthly repayments may be higher.

Debt consolidation loans with Norwich Trust

When you apply for a loan with us, we will always check to make sure that the loan repayments are affordable to you. If you are applying for a debt consolidation loan, it may be that the affordability of the loan is dependent on one or more of your outstanding credit items being paid off with the loan.

If this is the case we will, wherever possible, make payments to your lenders directly to pay off the items you have said that you want to consolidate.

Is debt consolidation a good idea?

Debt consolidation can be a useful tool for those looking to get on top of their finances, but it is not always the best solution for everyone. There are pros and cons to debt consolidation, so it’s important to consider all aspects of your own finances to make sure you’re not putting yourself in a worse situation.

If you do decide that debt consolidation is right for you, there are some steps you can take so you don’t fall into further debt. Closing any consolidated credit cards and overdrafts once the balance has been repaid can help to make sure that the amount you owe does not increase.

It’s important to understand that if you re-use available credit items after they have been consolidated, or take out new items of credit after you have consolidated, this may put you in a position where you cannot afford to make your repayments.

Interest rates: For someone with several high-cost debts, a consolidation loan with a lower interest rate would mean more of their payments go towards reducing the loan balance rather than on interest and could mean that the debt is repaid more quickly.

Repayments: One of the advantages of debt consolidation is having fewer repayments. Those with multiple debts across different lenders are often juggling different due dates and interest rates. Replacing these with a single repayment can make it much easier to keep on top of repayments.

Low existing rates or promotional rates: If your current debts have a low interest rate or you’re within an interest-free period, consolidating those debts using an item of credit with a higher interest rate could cost you more.

Longer term: Debt consolidation can simplify repayments, but it may also increase the time it takes to become debt-free. If you choose a longer loan term than you have left on the items you are consolidating to lower your monthly repayments, you are likely to pay more in interest over time.

Credit history: Debt consolidation usually means applying for a new card or loan. If you have a poor credit rating due to missed payments, defaults or CCJs you might find it difficult to apply for new credit items, especially ones with lower rates.

Your finances
Do you know how much you have coming in and going out each month? A budget planner can help you keep track of your money and determine how much you have left over each month. A debt consolidation loan may increase your monthly payments, so it’s vital to ensure you can afford it.

Your existing debts
Are you looking to consolidate all of your existing debts, or just some? How much do you owe overall and what interest rates are you being charged? All this information will help you understand the loan amount or credit limit you’ll need to consolidate your debt and let you compare the interest rates of any offers you receive, with your existing credit items. You should also factor in any extra fees or charges you might be charged for ending your existing loans early or transferring a balance.

Your income
If you’re aware of any future changes such as retirement or promotion, you should factor these in. Most consolidation loans will have a term of at least 12 months and any changes in your income during the loan term could affect your ability to afford the repayments. It’s really important you make sure you’re happy you can afford the loan repayments over the whole term.

Consolidating debts requires you to take on more debt, even if it’s temporary. Each person’s situation is unique so if you are struggling with debt, it may be beneficial to seek advice to truly understand if debt consolidation could help you. You can access free independent financial advice by contacting Stepchange or your local citizen’s advice bureau. Both employ qualified debt advisors who will be able to thoroughly assess your financial situation and help you find the best way to tackle your debts.

You can also find lots of useful help and guidance about everyday money and dealing with debt on the government’s Money Helper website.