The Ultimate Guide to Debt Consolidation

Is your debt keeping you up at night? Are you looking at the multiple payments you have to make each month and wondering if there’s an easier way to get back in control of your finances?

According to a research briefing that was put out by the House of Commons, household debt in the United Kingdom was sitting at an average of 130.2 % of disposable income during the first quarter of 2021.

If this is you, looking at these numbers may be intimidating. And if you’re dealing with four or five-figure totals, nobody would blame you for reviewing your finances and wondering how you’ll pay the money back.

Of course, one option to write off up to 90% of unaffordable debts is an IVA – at Become Debt Free we’ve helped thousands of people to regain control of their finances and lives through Individual Voluntary Arrangements. Get in touch with us for a friendly, confidential and no-obligation chat. Our team will examine all possible solutions, including IVAs, Debt Relief Order and Debt Consolidation.

Debt consolidation is a financial tool that more and more people have been using to work towards becoming debt-free. Could debt consolidation loans be a viable solution? Does it really make sense to fight debt with more debt?

Keep reading to learn about how you may be able to shake off your debts by consolidating them.

What Is Debt Consolidation?

Although the word “consolidation” might make things sound rather complicated, debt consolidation is simply the process of consolidating, or bundling up, your debt payments. This is commonly done by taking out a loan, using the funds to pay off outstanding accounts, and then focusing on paying off a single debt that’s owed to a single creditor.

The Bank of England claims that the average adult in the UK is carrying roughly £30,575 in debt. If you’re in debt and you have multiple balances across multiple accounts, you may benefit from exploring pursuing debt consolidation.

What Are the Advantages of Debt Consolidation?

Even though the whole concept of consolidating your debts might seem pretty straightforward, it still begs the question:

How does effectively rearranging your debts help you financially if you’re not actually reducing the amount that you owe?

We’ve put together a list of four key benefits that you can expect to enjoy if you opt for debt consolidation.

1. You Can Simplify Your Finances

Managing monthly payments can be a hassle in the best of times. But when your list of creditors includes multiple credit card providers and the bank, keeping track of your finances can quickly go from “This is kind of complicated” to “I need a calendar to keep track of this.”

When you opt for a debt consolidation strategy, you’re able to take those debts and roll them into a single payment. Or put another way, instead of struggling to stretch your paycheck so that you’ll have enough money for the next payment, you can simply pay a single monthly sum to one creditor.

2. You Can Extend Your Repayment Period and Reduce Your Monthly Payments

Be honest.

Which one of these scenarios would be easier on your budget? Paying £1 a month for 40 months or paying £40 all at once? All things being equal, the first situation would likely put the least amount of strain on your finances.

Sometimes paying down debts can be difficult because shorter repayment periods often mean that you have to make larger monthly payments. One major advantage of consolidating your debts is that you can potentially buy yourself more time to bring the total balance down. And along with this longer repayment period, you can often get away with paying a smaller amount per month over a longer period of time.

The perks of this approach will depend in part on the way that you prefer to manage your finances. If you’re the type of person who wants to be out of debt as quickly as possible, this might not matter as much to you. But if you like the idea of being able to create a sustainable budget, debt consolidation could be an attractive option for you.

3. Debt Consolidation Can Improve Your Credit

Credit ratings can be a bit of a catch-22. On the one hand, lenders want to see that you’ve used your credit responsibly before they’ll be willing to provide additional funds. But at the same time, to be considered a stellar borrower, you often need to take out some credit to get there.

Most of the time, taking on additional debt can be difficult to justify when you’re already juggling multiple monthly payments. But if you take out a debt consolidation loan, you can give your credit profile a boost while paying your debt at the same time.

Are There Any Disadvantages of Debt Consolidation to Be Aware of?

On paper, there’s a lot to like about simplifying your finances, getting more flexibility in your debt repayment process, and establishing yourself as a trustworthy borrower. However, even though consolidation is a well-established method of managing debt, there are still some concerns that you will want to be on the lookout for as you consider your debt repayment options:

1. You May Have to Pay Fees

Depending on your lender, the cost of taking out a loan can add up to more than the total sum of your interest rate and your principal. Why? Because it’s not unusual for certain creditors to charge fees and costs in exchange for setting up your loan.

To be fair, this may not be a problem if you’ve got a bit of cash saved up. But if you’re scraping for funds every month as it is, these fees can make it difficult to take out loans that you would otherwise qualify for.

2. Financial Discipline is an Absolute Must

Difficult financial situations can happen to anyone. But if you’re opting for debt consolidation, it’s important to be in total control of your budget before you start applying for loans.

Missed payments can have serious effects on your credit. And if you decide to tackle your debts again in the future, that combination of a lower score and a shaky payment history can make it even harder for you to secure personal loans in the future.

3. You May Be Offered a Fixed Payment Loan

You may have read this option and thought, “Well, that’s not a problem.”

But let’s say that you work a job that pays you on commission. Or maybe instead of a salesperson, you’re a freelancer with an income level that fluctuates every other pay period. A fixed payment plan may not be ideal if your bank account balance is prone to extreme feast or famine cycles.

That’s why most financial advice around debt consolidation will require you to spend some time thinking about the methods at your disposal. Can you afford to take out a loan? And if you can get a loan, do fixed payments make sense for your finances?

You’ll have to be honest with yourself when making these assessments.

4. Your Interest Savings May Be Hard to Predict

Depending on details like the method of debt consolidation you choose or the particulars of your finances, your interest rate can vary dramatically. For instance, let’s say that you opt to consolidate with a combination of a personal loan and a low-interest credit card.

If something happens and the credit card puts you outside of that promotional period for the credit card balance transfer, you could be paying significantly more than you expected. And even then, you never know what your rate will be until you’ve seen some formal offers.

One of the major benefits associated with debt consolidation is the opportunity to lower your interest payments. But in practice, you won’t have a good sense of how much money you’re saving until you see the real numbers in front of you.

Who Should Get a Debt Consolidation Loan?

We’ve just covered the basics of what debt consolidation is and why it’s useful. But if you happen to owe money, is consolidating your debts an option that you should be pursuing? The ideal candidate for a debt consolidation loan will usually have these three qualities:

1. A Steady Income

For all the talk of how debt consolidation can help you simplify your monthly payments, there’s one major catch involved:

Debt consolidation can only make your budget more predictable if you make a regular income.

According to Jobted, the average annual salary in the UK is £29,600. If you’re employed and you’ve got a regular paycheck coming in every month, those reduced monthly payments and favourable repayment terms can help you manage your money. But if you don’t have steady employment, you may need to think about getting your debts written off or pursuing other financial solutions.

2. You Have Solid Credit

Another hurdle that’s faced by would-be debt consolidators is the simple reality that you need to start with decent credit to pursue this option successfully.

Why?

Because the entire premise of this strategy involves taking out a loan to pay off your current outstanding loans. However, if your credit is less than ideal, you may not be able to qualify for a large enough loan amount. And if you’re not able to get approved for another loan altogether, you may not be able to secure the funds needed to get the process off the ground.

BBC has a Debt Test tool that’s designed to give you a look at how a lender may see your application. Although the calculator’s results may not always be perfect, it can give you a solid sense as to whether or not you can secure a loan now, rather than spending more time paying down your debts before revisiting the idea of consolidation.

3. The Right Amount of Debt

From the outside looking in, it can seem a little bit odd to be thinking in terms of the “right” level of debt. But it is possible for your debt burden to be either too low or too high for a debt consolidation loan to make sense.

Think about it.

If you’re earning an average salary and you have solid credit, but you only owe about £50 across all of your accounts, it’s probably not worth your while to go to the trouble of taking out a loan when you’re just a paycheck or two away from becoming debt-free.

However, at the same time, if your debts add up to such a high number that it’s impossible to get a loan and you’re just not earning enough to cover your minimum payments, you may be better off considering the possibility of an IVA.

The exact figures will depend on the details of your financial situation. But if you’re looking at the possibility of taking out a debt consolidation loan, the amount of debt you’re carrying matters.

Debt Consolidation Loan Options

We’ve just talked about debt consolidation and why it’s such a popular financial strategy. But did you know that there’s more than one way to consolidate debt? These are three of the more common options that many UK residents pursue.

Option #1: Credit Card Balance Transfers

It turns out that sometimes the best way to consolidate credit card debt is with another credit card. With this strategy, you’d look for a credit card that’s offering a zero-interest or a low-interest promotional period or one that specifically caters to individuals who are looking to pay their debts.

From there, you would apply and then proceed to pay off the credit card after bringing your other credit card balances down to zero.


This is a solid strategy if your total debts don’t amount to a whole lot and you have reason to believe that you’ll be able to pay your balance off within a short time frame. With average credit card interest rates sometimes reaching heights of over 20%, those quick turnaround times are the key to making a credit card-based debt consolidation strategy work for you.

Option #2: Line of Credit

A line of credit is another option that you can explore as you look for an initial source of funding. With this approach, you can save a lot of money on interest rates and you can often get more favourable terms of repayment. But the downside is that you often have to put your house, your car, or some other type of valuable asset up as collateral.


This can be risky if you’re not absolutely certain that you’ll be able to make your payments on time. After all, when you’re dealing with larger sums of debt, you don’t want to be facing the possibility of losing your home as well. In addition, because your lender may have to spend time sorting out the market value of your collateral, it can take time to get approved for a secured line of credit.

Option #3: Debt Consolidation Loans

Here at Become Debt Free, debt consolidation loans are one of the services that we offer to our clients. Why? Because the simplicity of being able to consolidate credit card debt, student loans, and other forms of loans into a single payment is hard to pass up. And also because once you’ve sorted out the terms and conditions of payment, you can often lower your month-to-month costs.

So if you’re the sort of person who’s always wanted to build up an emergency savings account or to simply end the paycheck to paycheck lifestyle, a debt consolidation loan can go a long way towards allowing you to do exactly that while paying down your outstanding debts. 

Here’s How You Can Consolidate Your Debts

Let’s just say that you’ve read everything here on debt consolidation and you’ve been nodding along and saying things like “Okay, how do I sign up for this?” We’ve gone over the reasons why debt consolidation can be helpful. But of course, the theory behind the concept doesn’t actually teach you how to consolidate debt.

The good news is that consolidating debt follows a similar process regardless of the exact method you decide to use.

Step #1: Calculate How Much You Owe

When you’re dealing with the day-to-day doldrums of managing your finances, it’s easy to lose sight of the exact numbers. After all, if you’re making your payments every month, you’re probably more concerned with your minimum payments than you are with the total balances.

That’s why debt consolidation starts with sitting down, identifying your creditors, and determining the exact amount of debt you owe across all of your accounts. The number that you come up with will give you the loan amount that you should ideally be seeking.

Step #2: Figure Out Your Best Consolidation Option

Earlier, we listed a few of the ways that it’s possible to consolidate debt. But depending on the particulars, not all consolidation options are created equal. For instance, the shorter timelines involved with taking advantage of a credit card’s promotional interest period can be tricky if you owe a larger amount of money.

And similarly, if you don’t own your home or are leery of putting up collateral, a secured line of credit may not be available to you.

Your ideal form of debt consolidation may differ dramatically from someone else’s. That’s why it’s important to weigh the pros and cons before you make any binding decisions.

Step #3: Make Your Applications

So at this stage, you’ve calculated your debts and then you’ve determined the specifics of how you want to consolidate your debt. Now your next step is to make some applications.

Whether you’re opting for a credit card application or an outright personal loan, lenders and credit issuers will want to make sure that you’re reliable and trustworthy. In addition to the initial approval process, your future creditors will also take a look at the loan amount you’re seeking.

Assuming you’ve created a shortlist of companies and lenders to apply with, you’ll want to make your applications in as orderly a fashion as possible. Making too many applications at once can ironically make it harder to get approved later on.

Step #4: Pay Off Your Current Outstanding Balances

You’ve made your application, you’ve been approved, and the money has hit your account. Congratulations! What’s your next step?

The next thing you do is take the funds you’ve just acquired and use them to pay off your current debts. All of those credit cards, payday loans, or previous lines of credit can all be taken off your calendar because those accounts will be done and dealt with.

It’s important to note here that the amount you owe still doesn’t change here. But even so, there’s a certain level of satisfaction that comes with watching all of those balances drop to zero.

Step #5: Make Payments on Your Consolidation Loan

You’ve used the funds from your loan to pay down all of those other outstanding accounts. At this stage, if you were able to secure a total debt consolidation, the only payments you’re dealing with are the ones you owe to your lender or your new creditor.

What should you be doing next?

Paying off the final account. This stage can take a while depending on the exact amounts that you started with. But between your lower monthly payments and the fact that you’re not paying for interest across multiple accounts, don’t be surprised if you find that your money is going further as you work towards freeing yourself from debt.

Getting Out of Debt Can Be Easier Than You Think

Being in debt can make you feel like you’re on a never-ending financial treadmill. It often feels like your monthly payments aren’t bringing down your balances as effectively as you’d like. This is where debt consolidation can help. 

At Become Debt Free, we specialize in helping UK residents like you aggressively tackle debt and get on top of their finances. If you’d like some financial advice or some assistance with finding the right debt solution for your circumstances, check out our site to learn more about what we can do for you.

Proud to Support

Supporting Shelter
Supporting Mind
Living Wage Employer
Become Debt Free Logo

Contact Us

Tel: 0113 237 9500
info@becomedebtfree.co.uk
Re10 (Finance) Ltd, York House Unit 4, Gemini Business Park, Sheepscar Way, Leeds, LS7 3JB
Trust Pilot Reviews
Insolvency
R3 Business Accreditation
Insolvency Practitioners Association Accreditation
Customers can get free debt advice from the Money Advice Service – an organisation set up by the Government to offer free and impartial advice to those in debt. For more information from the Money Advice Service visit www.moneyadviceservice.org.uk. MAS is part of the Money & Pensions Service. We are not affiliated with MAS in any way.

Become Debt Free is a trading style of Re10 (Finance) Limited Registered Number 04651137.  Data Protection Act Registration Number – Z8613095

Become Debt Free specialise in providing and administering Individual Voluntary Arrangement (“IVA”) solutions to individuals based in England, Wales and Northern Ireland.  We do not administer Debt Management Plans, Debt Relief Orders, or any other debt solutions.  We only provide advice after completing or receiving an initial fact find where the individual(s) concerned meets the criteria for an IVA, therefore, all advice is given in reasonable contemplation of an insolvency appointment.

* To qualify for debt write off in an IVA with us, you must have a minimum of £7,000 of qualifying unsecured debt owed to two or more creditors.  The amount of debt write off is based on your own personal circumstances – typically this could be up to 85% of what you owe; and this has been achieved by over 10% of our customers who have successfully completed their IVA’s in the last 12 months.  The amount of debt write off differs for each customer and is dependent upon their individual financial circumstances and subject to the approval of their creditors.

Andrew Bowers is authorised in the UK to act as Insolvency Practitioner by the Insolvency Practitioners Association.

 

Scroll to Top