What is debt consolidation?

What is debt consolidation?

Ever felt you have too many credit cards, store cards and small loans? Debt consolidation brings all these different smaller debts together into a single monthly payment.

How does debt consolidation work?

A new loan is taken out and the funds used to pay off the existing smaller loans.  In this way you are effectively transfering your debt to the new loan and make a single monthly payment on this new loan until it is cleared.

Early Repayment Charges (ERC)

An Early Repayment Charge (ERC) is a payment that is due to the lender if the borrower pays off the loan prior to the end of the loan term, known as a fixed term.  Before embarking on debt consolidation check your existing loans to make sure that you have no early repayment charges associated with each loan.

Advantages of Debt Consolidation

It is easier to administer a single monthly payment than it is to track and service several different loans with likely different monthly payment due dates. if you consolidate you debt into a single loan then a single monthly payment is due.

Settling credit cards and closing existing loans may lead to an improvement in you credit rating because credit reference agencies receive information from your existing lenders to the effect that you have settled the loan and this could lead to better credit scoring.

Things to consider

As with all loans, careful consideration needs to be given and advice sought before taking out the new loan.  It is true to say that, generally, the more you borrow the lower the interest rate.  If your borrowing needs fall just below a rate change threshold consider increasing the loan to attract the lower interest rate.  Check the terms on the new loan and in the case on a variable term (i.e. a loan with no Early Repayment Charge) it may be possible to borrow slightly more to gain the lower rate and then repay an amount early.


As with all financial decision, research the topic and any proposed loans thoroughly and take financial advice, including affordability, before committing to a binding loan agreement.