Debt Consolidation Calculator
See how much you could save by combining your debts into one lower monthly payment with a secured loan
What is Debt Consolidation?
Debt consolidation involves combining multiple existing debts, such as credit cards, personal loans, and overdrafts, into a single loan with one monthly payment. Rather than managing several repayments at different interest rates and on different dates, you take out one new loan to pay off all your existing debts. This can simplify your finances and, depending on the terms, may reduce the total amount you pay each month.
How Does It Work with a Second Charge Loan?
A second charge loan, also known as a secured loan, uses the equity in your property as security. Because the loan is secured against your home, lenders can often offer lower interest rates than those charged on unsecured debts such as credit cards or personal loans. The loan sits alongside your existing mortgage, and you repay it over an agreed term, typically between 3 and 25 years. The proceeds are used to clear your existing debts, leaving you with just one monthly payment to manage.
Pros and Cons
The main advantage of debt consolidation is the potential to reduce your monthly outgoings by replacing high-interest debts with a single lower-rate loan. It also simplifies your finances, making budgeting easier with just one payment to track. However, it is important to understand the trade-offs. Spreading repayments over a longer term may reduce your monthly costs but could increase the total amount of interest you pay overall. Additionally, because a second charge loan is secured against your home, your property is at risk if you fail to keep up repayments.
When Does Debt Consolidation Make Sense?
Debt consolidation may be worth considering if you are paying high interest rates across multiple debts, if you are struggling to keep track of several repayment dates, or if your monthly outgoings on debt repayments are putting pressure on your budget. It is less likely to be beneficial if you have only a small amount of debt, if your existing rates are already low, or if taking on a longer loan term would mean paying significantly more interest overall. Speaking to a qualified adviser can help you assess whether consolidation is the right option for your circumstances.
Frequently Asked Questions
What is debt consolidation?
Debt consolidation is the process of combining multiple debts into a single loan with one monthly payment. Instead of making separate payments to different creditors at varying interest rates, you take out one new loan to clear them all. This can simplify your finances and may reduce your monthly outgoings, depending on the rate and term of the new loan.
Will I save money by consolidating my debts?
Whether you save money depends on the interest rates you are currently paying, the rate on the consolidated loan, and the loan term. If your existing debts carry high interest rates, such as credit cards at 20% or more, consolidating into a secured loan at a lower rate could significantly reduce your monthly payments. However, if you extend the repayment term, you may pay more interest in total over the life of the loan.
What debts can I consolidate?
You can typically consolidate most unsecured debts, including credit cards, personal loans, overdrafts, store cards, and catalogue debts. Some people also use debt consolidation to pay off hire purchase agreements or other finance arrangements. The key requirement is that you have sufficient equity in your property to secure the new loan.
Is debt consolidation right for me?
Debt consolidation may be suitable if you are paying high interest rates across multiple debts, finding it difficult to manage several repayment dates, or if your monthly debt repayments are putting strain on your budget. It may not be appropriate if you have a small amount of debt, if your existing rates are already competitive, or if you would need to extend the term significantly. A qualified adviser can help you assess your options.
What are the risks of debt consolidation?
The main risk is that a secured consolidation loan uses your home as collateral, meaning your property could be repossessed if you do not keep up repayments. Additionally, while monthly payments may decrease, extending the loan term could mean you pay more interest in total. It is also important not to take on new debt after consolidating, as this could leave you in a worse financial position than before.
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Your home may be repossessed if you do not keep up repayments on your mortgage.