Debt Consolidation Guide

Put simply, debt consolidation is swapping a number of small loans for one bigger one, often secured on your home (like your mortgage) and often over a longer period. You'll pay less per month and, if your current debts include a number with high interest rates (like store cards) you may even pay less overall.

Debt Consolidation Loans

A debt consolidation loan may be a debt solution for you if your debt problems are not severe - for example if cutting the interest rates you are paying is all you need to do to see the wood for the trees. Or, you may need to consolidate debt if your income has gone down - provided you have budgeted carefully and have no illusions about what you can now afford.

Debt consolidation loans can also be a help to those people who face unexpected financial commitments and have equity in their home. You are unlikely to find a cost-effective debt consolidation loan if you are not a home owner with a mortgage that is considerably lower than the value of your home.

It's highly likely that your new debt consolidation loan will be secured on your home - like your mortgage: Fail to pay and you could lose your home. If the remortgage you need is greater than 85% of the value of your home, then you are (January 2012) currently less likely to be offered a remortgage on favourable terms than you would have been a few years ago. You may be able to get a smaller loan secured on your property as a second charge, but this will probably be at a relatively high interest rate.

So, do your budgeting very carefully and consider the risk. If the switch only yields small savings and if you cannot use those savings to repay more debt, then you may be stepping from the frying pan into the fire. If your situation continues to get worse and you can't afford the repayments you could be facing repossession. If you think you can cope with the cost of the loan, but believe that the value of your home may fall, then you may be seriously restricting your ability to move home, should you need to (because your housing needs change or your income falls).

Debt Consolidation Advice

We would advise you to walk away from the debt consolidation option if the following is true of your situation:

• If you've had a consolidation loan before and have debt still owing from it
• If you are going to use the loan to free up store or credit cards that you intend to use again, rather than reducing your unsecured debt permanently.
• If either of the above are true, or if you have consolidated loans several times before you may be better off looking at whether a ClearDebt Individual Voluntary Arrangement or Debt Management Plan may be right for you.

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Consolidate Debt with a Consolidation Loan

Think hard before deciding a consolidation loan is right for you. When you consolidate debt nothing is written off, it's just moved from an expensive loan to a cheaper one (in terms of monthly payment - the total cost of the loan, over time, can be higher). Debt consolidation can be a costly option and can put your home more at risk.

Debt Consolidation

If you think your debt situation is likely to improve, debt consolidation could be the answer. If you feel your debt will still continue to rise, then debt consolidation could just be a step on the road to bankruptcy.

Compare Debt Solutions

If you're unsure about whether a debt consolidation loan is right for you, we've put together a debt solution comparison table where you can compare debt consolidation with IVAs, Debt Management Plans and Bankruptcy.