What is debt consolidation?

It works by merging several debts, including loans, credit cards, and overdrafts, into a single loan.

If you have a number of debts, it can be hard to know what the best path forward is. You may have:

Deciding where and when to make repayments can be difficult. Each debt may have a different interest rate and how often you make repayments can also vary. For example, if you have 2 credit cards, a store card and a personal loan, you could be making 4 repayments every month. One of these may have a higher interest rate than the others. 

A debt consolidation loan can merge these debts into 1 loan to lower your monthly payments. It gives you a single interest rate, one recurring repayment, and a clear loan term.

A debt consolidation loan may reduce the stress and effort of managing multiple debts. But it’s important to check how it will affect your total repayment amount.

Even if the interest rate on a new loan is lower than any debts you have at the moment, you might still end up paying more interest if the new loan has a longer term.

How much interest you pay is determined by the:

When you consolidate your debt, the money you owe on other loans, for example, will be paid off. It’s worth checking the terms and conditions of your existing debt, as there may be an early repayment fee. If so, it’s important to factor this into your calculations.

You need to be able to meet the new loan payments – to avoid going into further debt and making a difficult situation worse. Creating a budget can help you see how much you can comfortably pay each month.

Consolidating debt can give an opportunity to cut your spending and get back on track. However, if you’re regularly using credit to pay for everyday essentials, this could be a sign that you’re in financial difficulty. In that case, a debt consolidation loan may not be the best solution. 

If you need help getting your finances back on track, HSBC has trained specialists you can speak to.