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How to consolidate debt
Combining existing debts could make your finances easier to manage each month.
Options for debt consolidation
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If you can borrow money from family or close friends, you could repay your debts, cut your borrowing costs and minimise the risk of negatively impacting your credit score.
If you can rely on the generosity of those close to you:
- write an agreement, covering the terms of the loan and your commitment to repay
- set up a regular standing order to make repayments automatically each month.
However, this may not be an option for everyone, and there are things to consider:
- You could be tempted to borrow more, undoing the benefit of consolidating your debts.
- You put personal relationships at risk if you fail to repay what you borrow.
- You may incur charges for settling other debts early.
There are a number of other borrowing options which may be more suitable.
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If you’re approved for a debt consolidation loan, the money you borrow will be sent to your current account, so you can arrange to pay off your other balances. With some lenders, including Lloyds Bank, you may be able to arrange automated debt repayments as part of your loan application.
To suit your monthly budget, you could choose a loan repayment term of 1-7 years, giving you a target end date, after which your balance will be repaid in full, so long as you’ve made all of the necessary payments.
Before you apply, it’s worth considering:
- Which balances you’d you like to consolidate, and when. If you have balances on 0% interest, you might want to wait until promotional offers expire, before you refinance those.
- Whether the loan you want to apply for is secured, e.g. against your home, meaning it could be repossessed if you can’t keep up with repayments.
- Whether early repayment charges apply to debit balances you hold elsewhere. Your balance may not reflect these, so make sure you understand any costs, including any pending interest charges.
- Whether you’re eligible for additional credit, and what impact applying could have on your credit record and score. Some lenders offer a quotation service, helping you to understand your eligibility, without affecting your credit score.
If the interest rates are fixed your loan repayments will be too, making it even easier to keep track and understand your borrowing costs.
If the interest rates are variable, your loan repayments could go up or down.
On some loans, you may be able to make overpayments, potentially reducing your overall loan term and borrowing costs. Just be aware that early repayment charges may apply.
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With a balance transfer, you could move credit and some store card balances to a single credit card, making your outgoings easier to manage. By transferring higher interest rate balances, you could also save on borrowing costs, although it is important to account for any transfer handling fees.
In addition, some credit cards give you the option to make a money transfer, moving funds from your credit card to your UK current account, helping you to manage cash-only purchases, unexpected bills or to consolidate other debit balances you can’t transfer, such as selected store card or loan balances.
It’s just important to know that a transfer fee may apply, and purchases made using cash, debit card or bank transfer won’t be covered by Section 75 of the Consumer Credit Act 1974.
An introductory or promotional rate could offer low or even 0% interest on transfers for a defined period. To limit your borrowing costs, aim to repay your balances before any offers expire and the standard interest rates apply instead. Note also, that if you miss a payment or go over your agreed credit limit, you could lose any promotional or introductory interest rates, so it’s important to manage your credit card account carefully.
Before you apply, it’s worth considering:
- The credit limit you’d need in order to consolidate all of your debts.
- Whether early repayment charges apply to balances you hold elsewhere.
- Whether you’re eligible for additional credit, and what impact applying could have on your credit record and score. Some lenders offer credit check tools, helping you to understand your eligibility, without affecting your credit score.
Unless a 0% interest rate applies to purchases, to avoid paying interest on purchases, you need to pay off your statement balance in full and on time every month, including any transferred balances.
Unlike a personal loan, there’s less structure around your repayments, which could make it harder to budget, especially if you go on to use your credit card to make other transactions.
That said, you can repay as much as you want when you’re able to, or as little as the minimum payment each month. Just be aware that if you only pay the minimum, it’ll take longer and cost you more to clear your credit card balance, and you also risk falling into persistent debt.
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You may be able to borrow more on your existing mortgage, or remortgage with a new lender in order to consolidate other debts.
However, this could depend on:
- Whether your lender will allow you to add to your mortgage for this purpose.
- Your age and whether you’d be extending your mortgage into retirement.
- Your personal circumstances and the health of your credit record.
- Whether you can afford additional repayments.
- How close you are to paying off your mortgage.
- The loan to value ratio for your property.
Because your mortgage is secured against your home, it may be repossessed if you don’t keep up with your repayments. That in itself may be a reason to choose an alternative borrowing option.
Unsecured debts, like credit cards or personal loans, typically have higher interest rates, compared with secured loans, such as a mortgage.
However, your borrowing costs over a long period could be significant, even at a low interest rate. The typical duration of a mortgage is 25 years, although in the UK you may be able to get a mortgage for anything from 6 months to 40 years.
To limit your costs, you should only borrow what you can reasonably afford to repay, over the shortest possible term. Another borrowing option may be cheaper over a shorter term, even if the interest rate is higher.
You must seek support from a mortgage adviser before you apply to borrow more or change your mortgage in order to consolidate debts. You should explore all financing options to find the one which suits your individual circumstances.
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Usually only available to homeowners over the age of 55, you may be able to release tax-free cash from your home, helping you to tackle money worries and live more comfortably, whilst staying in your own home.
This generally takes the form of a loan, secured against your property. You won’t have to pay anything until you pass away, or move out of your home into long-term care.
Before deciding on whether equity release is right for you, you should speak to a qualified adviser. They will be able to explain what’s involved, the risks and tell you about other options. We can put you in touch with a Scottish Widows Later Life Lending Adviser, or you can find a qualified adviser through MoneyHelper and the Equity Release Council.
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If you’re over the age of 55 (rising to 57 from 6 April 2028) and have been contributing to a pension, you may be able to access a tax-free lump sum from your fund, using that to pay-off debts. However, it’s important to consider the future impact of this, leaving you with less income when you are older.
We recommend speaking to a fully qualified pensions adviser, regulated by the Financial Conduct Authority, before deciding whether taking funds from your pension is the right thing to do.
Where can I go to get guidance or financial advice about my benefit options?
Impartial guidance:
Pension Wise from MoneyHelper is the Government’s free guidance service. They offer personalised guidance about available options and tax implications. You can find further information about the help they offer, or make an appointment with them, by going online at www.moneyhelper.org.uk/pensions
Impartial and independent financial advice:
For advice that is personalised to your own circumstances, you can speak to a financial adviser. They’ll normally charge you for any advice they give. If you don’t have a financial adviser, you can visit www.unbiased.co.uk or www.vouchedfor.co.uk to find one near you.
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