If you’re having trouble with your debts, you should always speak to an expert debt adviser to discuss your options. Think Money offers a range of debt solutions including debt management plans, debt consolidation loans and IVAs (Individual Voluntary Arrangements).
A debt consolidation loan is a loan that pays off all your existing debts - effectively 'consolidating' them into one, meaning you will make payments to one creditor instead of many.
It's possible to reduce your monthly payments by spreading them out over a longer period than your original debts, and you may be able to get a lower interest rate than the combined APR of your existing debts, saving you money.
Debt consolidation: things to consider
It's still a debt
Your debt consolidation loan will remain a debt until it's fully repaid - and you will have to be certain that you can keep up on your new repayments.
Consider the reason you struggled to make your original payments: if you fell behind because you have a fluctuating income, for example, then a debt consolidation loan may not be the best solution for your circumstances. But if you are sure you will be able to repay your debts at a slower pace, then a debt consolidation loan could help.
Equally, there are some people who are managing their existing payments just fine, but either want to simplify their finances, or would prefer to make lower payments in order to free up extra cash each month.
You'll still have to repay your full debts
It may sound a little obvious, but a debt consolidation loan has to be repaid in full. That's fine for a lot of people, but if the problem is that your debts are simply too big to repay within a realistic timeframe, then a debt consolidation loan is not a good option.
Another debt solution, like an IVA (Individual Voluntary Arrangement), may be more appropriate. Speak to a professional debt adviser if you are unsure.
You could end up paying more overall
Even if your debt consolidation loan's interest rate is lower than the combined APR, you could end up paying more interest if you spread out your repayments.
This is simply because you will be paying interest for longer - your APR is the total interest you will pay in a year, so if you decide to repay your debts for two years longer than your original arrangements, you will pay an additional two years' interest.
Your debt adviser should be able to help you calculate whether or not your new arrangement will save you money or not. Some people don't mind paying a little more interest - after all, you are still likely to benefit from lower monthly payments - but it's something you should consider before deciding on a debt consolidation loan.
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