Is debt consolidation a good idea?

So is debt consolidation a good idea?

The honest answer is that it depends on your debts, your budget and your reasons for considering it. For some people, consolidation is a sensible way to bring order, and sometimes savings, to scattered and expensive borrowing. For others it adds cost, drags repayment out over more years, or simply delays dealing with a deeper affordability problem. This guide is built to help you work out which of those you are looking at.

It helps to separate two questions. First, is the structure of your debt the problem, with too many payments and some of them at high interest? Second, can you comfortably afford the repayments on a single new loan? Consolidation answers the first question. It does nothing for the second, and it can make matters worse if the answer there is no.

When does debt consolidation tend to help?

Consolidation is most likely to be worthwhile when several of the following are true:

• You are juggling several debts and struggle to keep track of payment dates.
• Some of your debts carry high interest, such as store cards or an overdraft.
• You can get a new loan at a lower overall cost than your current borrowing.
• The single monthly repayment is genuinely affordable within your budget.
• You are confident you will not simply run the cleared balances back up.

When that is your position, swapping several high-interest debts for one cheaper, well-structured loan can cut both your stress and your total interest. Our page on the pros and cons of debt consolidation weighs these benefits against the risks, and comparing the options shows where a loan sits against the alternatives.

When is debt consolidation a bad idea?

Consolidation is less likely to help, and may actively do harm, when:

• Your debts are fundamentally unaffordable, not just badly structured.
• The only way to lower the monthly payment is to stretch the term over many years.
• Fees or a higher personal interest rate cancel out any saving.
• You would be tempted to spend on the cards again once they are cleared.
• You would move unsecured debt onto your home by taking a secured loan.

Why total cost matters more than the monthly payment

This is the single most important point in the guide. A lower monthly payment is not the same as a cheaper loan. If you reduce your payment by spreading the same debt over a longer term, you will usually pay more interest overall, because you are borrowing the money for longer.

Take an illustrative example: borrowing £8,000 over three years costs far less in total interest than borrowing the same £8,000 over seven years at the same rate, even though the seven-year option has the smaller, more comfortable monthly payment. Always ask the lender for the total amount repayable and compare that figure rather than the monthly cost alone. The loan repayment calculator shows how the term changes the total, and understanding APR explains how rates are quoted.

A quick decision checklist

Before deciding, work through these questions honestly. If you answer "no" to several of them, pause and look again at the alternatives, or get free advice first.

It is also worth sidestepping the common pitfalls set out in our guide to debt consolidation mistakes to avoid, which covers several traps that catch people out.

What if consolidation is not right for you?

Deciding against a loan is not a failure. If the sums only work by stretching the term, or if you are already borrowing to cover everyday essentials, the issue is probably affordability rather than the shape of your debt, and more credit rarely fixes that. In that case there are gentler routes, from a realistic budget and a repayment plan to a balance transfer or a debt management plan, and a free debt charity can walk you through them without charge or pressure.

Frequently asked questions