Should I consolidate my debts?

Last Modified 16th of February 2021

Sadly in these times of austerity, debt is something that thousands of households across the UK face. With rising food and utility prices, wage freezes and job cuts, more and more families are taking out loans to weather the economic storm.

In many cases, these debts do not consist of one single outstanding bill, but instead are spread out among several areas. For instance, you might have a mortgage, personal loan, overdraft and credit card.

The problem with accruing multiple debts is that it gets confusing: the amounts you owe differ, the interest rates being applied to those sums vary and the dates on which you must make minimum payments are not the same. It’s a big like trying to juggle without any training and, if not managed correctly, these debts can mount up and spiral out of control.

In some situations, people even choose to ignore their bills, hoping demands will go away if they remain unpaid – but this simply is not the case. By turning a blind eye you’re only making it worse.

One way to get a handle on the situation is to consolidate all your loans into a debt management plan. Generally speaking your mortgage will not be eligible, but collapsing your other unsecured debts into a single monthly payment could make tackling your financial problems seem more manageable.

Before you start looking into consolidation loans, you need to understand what you’ve got to pay out versus what you’re paying in. First of all, gather together statements from all your credit cards, current account overdrafts and personal loans and tot up roughly how much your debt equals in total.

Next work out how much spare cash you have each month to contribute towards paying off this debt. Create a spreadsheet of your monthly household income minus all bills, grocery costs, petrol and a modest – but realistic – spending money allocation. You should have a small amount left over for debt repayments.

If your debt problem is serious, you may want to consider having a de-clutter and selling some furniture or valuable personal items to finance your initial payments.

Once you’ve done your sums, the next thing to do is draw up a debt management plan with a financial organisation. This licensed debt management company will make agreements with all the people you owe money to, so that you only have to worry about sending the debt manager a single lump sum on an agreed date each month – it’s the manager’s job to share it out between the companies you are indebted to.

At this point, please make sure that the debt management firm you choose is licensed by the Office of Fair Trading.

If you’re unsure whether a consolidation loan is the right option for you or you don’t know which debt management company to use, Citizens Advice Bureau or the National Debtline can offer you impartial advice free of charge.

Once you’ve chosen your consolidation loan, make sure you understand the terms and conditions before signing any agreements. Some companies will charge an arrangement fee and may take a handling payment each month, so check out all costs associated with your debt management plan in advance.

If you’re happy to proceed with the arrangement, at this point the management company will take the burden off your shoulders and liaise with your creditors regarding a payment plan. They will negotiate monthly instalments on your behalf.

Your management company can also help at a later date if you come into more money and wish to settle your debts earlier. Some companies charge for early repayments, however they will liaise with your creditor to try and reduce or abolish this fee.

In the meantime, however, they will keep taking a fixed monthly payment and will deal with all your debts from this single sum. It is important that you meet these payments in a timely fashion, as failing to pay could breach the credit agreements your debt management firm has made on your loans, and the other creditors may pull out as a result.

There has been a lot of negative press about consolidation loans ‘ripping people off’ with sky high interest rates, but so long as you find an Office of Fair Trading approved firm there’s nothing to worry about. Debt management companies not only offer you the chance to get a handle on your outstanding sums, they also offer a peace of mind to those of you struggling to work out just how much you owe and how you’re going to pay it back.