What is debt consolidation?

If you have several debts it can be difficult to know what the best path forward is. Debt consolidation is the process of merging debts into one loan, which may help simplify repayments and reduce stress.

How does debt consolidation work?

Over time you can end up with multiple debts at different financial institutions. This can be through credit cards, store cards, overdrafts and personal loans. If this happens, it can be difficult to decide where and when to make repayments as each debt may have a different interest rate and repayment frequency.

For example, if you have two credit cards, a store card and a personal loan, you could be making four repayments every month. One of these may have a higher interest rate than the others. 

In this instance, would you prefer to focus on paying off the smaller debt first or the debt with a higher interest rate? Keep in mind you’ll need to be repaying all regularly. 

A debt consolidation loan can merge these debts. It gives you a single interest rate, recurring repayment and also a clear loan term. 

Things to consider before taking a debt consolidation loan

While a debt consolidation loan may reduce the amount of stress and admin of managing multiple debts, it’s important to check how it will impact your total repayment amount. Even if the interest rate on a new loan is lower than any current debts you may have, if the new loan has a longer term you may still end up paying more interest than you’re currently paying. 

The amount you borrow, loan term and interest rate will determine how much interest you have to pay over time. You can use a calculator to estimate how much this could be. You’ll also need to look at how much your ‘total amount payable’ will be if you continue with your current repayments so you can compare the two options.

You may also be charged an early repayment fee on any current loans. It’s important to factor this in to any of your calculations.

What next?

If you’ll save on interest and fees over the course of a debt consolidation loan, then it may be a good option for you. If it looks like you won’t save on interest and fees over the course of the loan it may be worth considering whether the benefits justify the extra cost. 

Find out more about debt consolidation loans.

Need more help?

If you need a bit of help getting your finances back on track HSBC has trained specialists that can help.