How could a debt consolidation loan save me money?

If you have a number of debts and would like to simplify your finances and/or reduce your monthly outgoings, then a debt consolidation loan could help.

A debt consolidation loan is, in short, a new loan taken out to repay your existing debts, after which you will repay the new loan in monthly instalments.

How could debt consolidation save me money?

1. Spread your repayments

By spreading your repayments over a longer period of time than your original debts, your monthly outgoings will be reduced. For example:

Amount of debt	Repayments	Monthly repayments
£1,500 (original debts)	12 (one year)	£125 + interest
£1,500 (debt consolidation loan)	60 (five years)	£25 + interest

As you can see, a significant amount can be saved each month through spreading your payments with a debt consolidation loan.

However, bear in mind that more interest will be paid in the long run, and that the debt will remain a burden for longer than it would have had you repaid the debt earlier.

2. Lower interest rate (in some cases)

If you are consolidating high-APR debts, for example credit cards or store cards, you could be able to save money in interest.

To demonstrate, a typical credit card APR is 17%. If your debt consolidation loan interest rate is around 8 or 9%, that`s around half the amount paid in interest. If you are spreading out your repayments, this could help to limit the effects of the increased total amount of interest.

Is debt consolidation always worthwhile?

There are some cases in which debt consolidation might not be the best way to reduce your debts.

If your debts only have a relatively low interest rate - for example, overdrafts, which are often interest free whilst within agreed limits - then the higher interest rate on the debt consolidation loan will result in you paying more interest overall.

However, some people still prefer the convenience of a single monthly payment and the ability to reduce their monthly outgoings, so try to weigh up the pros and cons before you make a decision - and if you are unsure, speak to an expert debt adviser.

Also, if you have a lot of debt, it`s possible that a debt consolidation loan would simply not be affordable in a realistic period of time. If that is the case, it might be worth considering a debt management plan or an IVA (Individual Voluntary Arrangement).

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