Debt Consolidation: Pros and Cons

Debt consolidation is often presented as a straightforward way to simplify your finances, but the reality is more nuanced. While it can offer genuine benefits for some borrowers, it is not without drawbacks. Understanding both sides is essential before making a decision that could affect your finances for years to come.

For a full overview of how debt consolidation works and the different options available, read our complete guide to debt consolidation.

The Pros of Debt Consolidation

One Simple Monthly Payment

Perhaps the most immediate benefit of debt consolidation is the simplification of your finances. Instead of keeping track of multiple payment dates, minimum amounts, and interest rates across several creditors, you have a single monthly payment to one lender. This makes budgeting considerably easier and reduces the likelihood of accidentally missing a payment, which could damage your credit score.

Potentially Lower Interest Rate

If your existing debts include high-interest credit cards (which commonly charge 18% to 30% APR or more), store finance, or overdrafts, consolidating them into a single loan at a lower rate could reduce the amount of interest you pay. This is particularly true if you consolidate with a secured loan, where rates may be considerably lower because the lender has the security of your property.

Reduced Monthly Outgoings

By securing a lower interest rate, extending the repayment term, or both, your total monthly payments could decrease. This can free up cash flow for other essential expenses and provide valuable breathing room in a tight budget. For many borrowers, this reduction in monthly outgoings is the primary motivation for consolidating.

Less Financial Stress

Managing multiple debts can be a significant source of anxiety. Letters from different creditors, varying payment dates, and the constant worry about keeping on top of everything takes a real toll. Consolidating into a single, predictable payment can reduce this stress and give you a clearer picture of your financial situation.

Could Help Rebuild Your Credit

If you consolidate your debts and make all your repayments on time, this could have a positive effect on your credit score over time. Reducing your credit utilisation (the proportion of available credit you are using) and demonstrating consistent repayment behaviour are both factors that credit reference agencies look at favourably.

The Cons of Debt Consolidation

You Could Pay More in Total

This is arguably the most important consideration. While your monthly payments may be lower, extending the repayment term means you are paying interest for longer. A credit card debt that might have been cleared in three years could, when consolidated into a 15 or 20-year secured loan, end up costing significantly more in total interest. Always ask your broker to show you the total cost of borrowing over the full term, not just the monthly figure.

Secured Loans Put Your Property at Risk

If you consolidate using a second charge loan or by remortgaging, the borrowing is secured against your home. This means that if you fail to keep up with repayments, your property could be repossessed. Before opting for secured consolidation, you should be confident that you can afford the repayments for the full term, including if interest rates rise (on a variable rate product) or if your circumstances change.

It Does Not Fix Spending Habits

Consolidation addresses the symptom — multiple debts — but not necessarily the cause. If overspending or poor budgeting led to the debt in the first place, there is a real risk of falling into the same pattern. Once your credit cards and overdrafts are cleared by the consolidation loan, the temptation to use them again can be significant. This could leave you in a worse position than before, with the consolidation loan plus new unsecured debts.

Fees and Charges Can Add Up

Depending on the type of consolidation, there may be several fees to consider: arrangement fees on the new loan, valuation fees (for secured loans), legal fees, broker fees, and potentially early repayment charges on your existing debts. These costs need to be factored into your calculations to determine whether consolidation is truly cost-effective.

Not All Debts May Be Suitable

While most common consumer debts can be consolidated, some types of debt (such as student loans, tax debts, or debts subject to legal proceedings) may not be suitable for inclusion. It is important to discuss your full debt picture with a broker or adviser to understand what can and cannot be consolidated.

Making the Right Decision

The key to making debt consolidation work in your favour is to look beyond the monthly payment and consider the full picture. Ask yourself:

• What is the total cost of the consolidation loan over its full term, compared to what I would pay if I continued with my current debts?
• Am I comfortable with the risks of secured borrowing, if applicable?
• Have I addressed the habits or circumstances that led to the debt?
• Can I commit to not taking on additional credit once my debts are consolidated?

A specialist broker can help you compare the numbers and determine whether consolidation makes financial sense for your situation. To see how much you could potentially save, try our debt consolidation calculator or read our guide on how much you could save with debt consolidation.

If you are unsure whether consolidation is the right path, free and impartial advice is available from MoneyHelper or StepChange Debt Charity.