When you consolidate debts you’re effectively putting them all into the same financial product and making one single repayment towards them each month. This can feel much more manageable compared to the multiple repayments you were making before. The amount of debt you pay back won’t change when you do this, but the interest and length of your loan term might, as well as your monthly repayment.
Consolidating debt basically involves borrowing one big chunk of money to pay off several smaller chunks of money, or a single debt that may be more expensive than your new financial product. This can be a loan or a credit cards with a balance transfer facility.Beyond the financial reasons, managing several debts that require different repayment dates, with varying interest rates, can feel overwhelming. Some people choose to consolidate what they owe for simplicity’s sake, and/or because the maths works out in their favour.
According to The Money Charity in May 2023 the average UK household has £65,513 of debt. Of which, £7,982 is ‘unsecured’ debt – typically credit card, overdraft and unsecured loan balances. Let’s round that to £8,000 and imagine it breaks down as: Credit Card: £5,000 – APR 30.4% Overdraft: £1,000 – APR 39% Outstanding Loan balance: £2,000 – APR 17.9%