Debt consolidation is often presented as a fresh start: replace several bills with one and get on with life. Sometimes it is a sensible move. Sometimes it costs more than carrying on as you are, or leaves you with your old debts plus a new one.
V5 Solutions has put together the questions worth answering before you consolidate, along with an example that shows why the monthly payment alone can be misleading.
What Exactly Would You Be Consolidating?
Start with a full list. For each debt, write down the lender, the balance, the interest rate, the monthly payment and how many payments are left. Include overdrafts, catalogue accounts and buy now pay later plans as well as cards and loans.
This list often reveals that some debts are nearly paid off or are on low or 0% rates already. Some people choose to leave those alone and look only at the most expensive balances.
Which Consolidation Option Fits Your Situation?
There are three common routes, each suited to different circumstances:
- Unsecured consolidation loan. A personal loan with fixed repayments, used to clear your other debts. Generally available to people with a reasonable credit record, and only saves money if the new rate is lower than the rates they pay now.
- Balance transfer card. Moves card debt to a promotional low or 0% rate, usually for a transfer fee. Only works as intended if the balance is paid off before the promotion ends.
- Secured borrowing. A loan backed by your home or vehicle. Lenders may accept applicants with weaker credit, but the asset is at risk if you fall behind.
A logbook loan with V5 Solutions falls into the third group. You keep driving your vehicle, but the loan is secured on it through a Bill of Sale, and it is a costly form of credit. We assess affordability using your bank statements and talk through your circumstances before any decision. If repayments would leave you short, consolidating this way would not be suitable.
A Worked Example: Lower Monthly, Higher Total
Imagine Sam has three debts with around two years left to repay on each. Sam is offered a consolidation loan that cuts the combined monthly payment by a third, because the new loan runs for four years instead of two.
On the surface, that looks like a saving. But Sam would be paying interest for twice as long. Unless the new interest rate is considerably lower, the total paid back could end up higher than if Sam had simply kept going with the original debts.
The lesson is to compare the total amount repayable on the new loan with the total left to pay on your existing debts. Our guide to understanding APR and the total amount repayable shows where to find these figures, and our article on avoiding hidden fees explains which charges to check in the paperwork.
What Will You Do With the Cleared Accounts?
This question is easy to skip and important to answer. Once your cards are cleared, the limits are still there. If they gradually fill up again, you end up with the consolidation loan and fresh card balances.
Consider closing accounts you no longer need, lowering limits on the ones you keep and removing saved card details from online shops.
Is Debt Advice a Better First Step?
If any of the following apply, speak to a free debt adviser before borrowing:
- You are behind on priority bills such as rent, mortgage, council tax or energy.
- You regularly rely on credit to get to payday.
- You cannot see how you would afford a single consolidated payment.
An adviser can look at alternatives such as a debt management plan, where you make one affordable payment that is shared between your creditors without new borrowing. Breathing Space, a government scheme in England and Wales, can give you up to 60 days of protection from most interest, charges and enforcement while you get help.
This article is general information, not financial advice. Free, impartial advice is available from StepChange, Citizens Advice and National Debtline. For a broader plan, read our guide to getting out of debt step by step.
Your car may be repossessed if you do not keep up repayments on a loan secured against it.
