Consolidating several small debts into one

Juggling a credit card, an overdraft, a buy now pay later balance and a catalogue account is stressful: several due dates, several interest rates and a constant risk of missing one. Debt consolidation means replacing these small debts with a single repayment, ideally at a lower overall cost. Done well, it simplifies your budget; done badly, it stretches the debt over years and can leave you owing more.

This page explains how consolidation works in the UK, when a small consolidation loan makes sense, the other options available, and the warning signs that you need debt advice rather than new credit. Mini-pret.com does not lend, broker loans or recommend any lender.

How consolidation works

A consolidation loan is usually an unsecured personal loan used to pay off existing balances in full. You then make one fixed monthly payment to the new lender for an agreed term. The aim is a lower interest rate, a clear end date, or both. Alternatives that achieve a similar effect include a 0% balance transfer credit card and, for larger amounts, borrowing secured on your home, which carries far greater risk.

Consolidation does not reduce what you owe on its own. It only changes the cost and the shape of the repayments, so the numbers must be checked carefully.

When it can help, and when it does not

Consolidation tends to work when:

• the new APR is clearly lower than the average rate you pay now;
• the term is not much longer than the time you would otherwise take to clear the debts;
• you close or stop using the cleared credit cards and overdraft, so the balances do not build up again;
• your income is stable enough to cover the new payment comfortably.

It is usually a poor idea when you are already missing payments, when the new loan only works by spreading repayments over many more years, or when you would be tempted to reuse the freed-up credit. A lower monthly payment can hide a higher total amount payable.

Comparing a consolidation loan properly

Gather a statement for each debt and note the balance, interest rate, monthly payment and any early repayment charge. Then compare with the new offer on two figures: the APR and the total amount payable. A loan calculator makes this quick.

• Use eligibility tools that run a soft search, so checking rates does not affect your credit file.
• Remember that the advertised "representative APR" only has to be offered to a proportion of applicants; your rate may be higher.
• Check for arrangement fees and early settlement charges on the new loan.
• Make sure the lender pays off your old debts, or that you do so immediately when the money arrives.
• Check that the lender or broker is authorised on the FCA Register.

For how fixed-rate personal loans work in general, see our page on the small personal loan.

Options other than a new loan

Balance transfer card

A 0% balance transfer card can move card debt to an interest-free period, usually for a one-off fee. It works only if you clear the balance before the promotional period ends, and acceptance depends on a good credit record.

Talking to your lenders

Lenders regulated by the FCA are expected to treat customers in financial difficulty fairly. You can ask for reduced payments, a temporary freeze on interest or a repayment plan. Contact them before a payment is missed whenever possible.

Free debt advice and formal solutions

If your debts feel unmanageable, free and impartial debt advice is the right first step. MoneyHelper, Citizens Advice, StepChange and National Debtline can review your budget and explain the options, which may include:

• a debt management plan, where one monthly payment is shared between creditors;
• Breathing Space in England and Wales, which pauses most interest, charges and enforcement action for a period while you get advice;
• formal solutions such as a Debt Relief Order or an Individual Voluntary Arrangement, with different rules in Scotland.

Commercial debt firms may charge for services that free advisers provide at no cost, so compare before signing up.

A checklist before you consolidate

• Have you listed every debt with its balance, rate and minimum payment?
• Is the new APR lower, and is the total amount payable lower or at least similar?
• Will the new payment still be affordable if your costs rise?
• Will you close the old accounts or cut the cards once they are cleared?
• Have you ruled out secured borrowing for small unsecured debts?
• Have you considered speaking to a free debt adviser first?

If the debts are mainly household bills rather than credit, our page on a small loan to pay bills looks at supplier payment plans and support schemes.

If your credit record is damaged

With missed payments or defaults on your file, mainstream consolidation loans are harder to get, and offers aimed at people with poor credit often carry rates high enough to make matters worse. A credit union may be more flexible, and community lenders sometimes offer small loans with support. Our page on a loan with a poor credit history covers this in more detail. When debts already exceed what you can repay, borrowing again rarely helps; advice usually does.

Scams to watch for

People struggling with debt are targeted by fraudsters. Warning signs include adverts on social media promising to "wipe your debts" or "consolidate everything, no credit check", requests for an upfront fee before any loan is paid, pressure to transfer money to a personal account, and firms that are not on the FCA Register or that copy the name of a genuine company. Never share your online banking passwords. If you are unsure, contact the lender using details you have found yourself, and report suspicious approaches.