The economic uncertainty caused by the Coronavirus pandemic, along with the UK falling into recession for the first time in 11 years, has resulted in many consumers taking time to re-evaluate their finances with the aim of reducing their monthly outgoings. For those in debt, a common way of reducing debt repayments is by consolidating debts.
Below, we’ve looked at the different options available to those looking to consolidate debt. Bear in mind that applicants for any new credit agreement will need to meet the lender’s lending criteria so may not be eligible the products mentioned below.
For those with a small amount of debt, to a maximum of a few thousand pounds spread across credit cards and overdrafts, an interest-free balance transfer card may be the best option. A 0% balance transfer credit card will enable borrowers to transfer their debt to the credit card, usually for a small fee, and then they have an interest-free period in which to pay off the balance on the card. Normally, it is advisable to create a repayment plan that ensures the full balance is repaid within the interest-free period.
The longest interest-free term on a balance transfer credit card that does not involve a monthly fee and without opening restrictions is 28 months. Both M&S Bank’s Transfer Plus Mastercard, which has a transfer fee of 2.85%, and TSB’s Platinum Balance Transfer Card Mastercard, which has a transfer fee of 2.95%, offer a 28-month interest-free period. As an example, those with a debt of £2,500, transferring it to either of these cards with a 28-month interest-free period would mean making monthly repayments of £89.29 for the 28 months. In order to become debt-free after the 28 months, it is important to not take out more debt during that time or spend on the credit card.
For those with a medium amount of debt, for example between £5,000 and £15,000, there are a number of options available. Taking out a personal loan is often one of the most common ways to consolidate medium-sized debts.
Consumers looking to consolidate £5,000 of debt into a personal loan to be repaid over 36 months will find that Tesco Bank currently offers the lowest rate of 3.40% APR with its Telephone Personal Loan and Online Personal Loan. This deal would result in 36 monthly repayments of £146.17 and a sum of £5,262.12 is repaid in total. It should be noted that this loan defers the first repayment for three months, during which time interest is added to the debt.
Those looking to consolidate debt of £10,000 to be repaid over five years will find that both cahoot and TSB offer the lowest rate of 2.80% APR. cahoot’s Online Personal Loan would result in 60 monthly repayments of £178.64 and the total amount repaid would be £10,718.40. This deal defers the first repayment for one month and interest is charged during that time. TSB’s Personal Loan also has 60 monthly repayments of £1788.64, which results in a total of £10,718.40 being repaid. Again, the first repayment is deferred for one month and interest is charged during that period.
cahoot and TSB also offer the lowest rate of 2.80% APR with the same loans at £15,000 to be repaid over five years. Those looking to consolidate debt of £15,000 with these loans have 60 monthly repayments of £267.96 and the total amount repaid is £16,077.60. Again, both loans defer the first repayment for one month and interest is charged during this month.
For a high amount of debt, for example over £20,000, a secured loan might be the cheapest option for consolidating debts. Secured loans are when a borrower uses an asset, usually their house, as security against the loan. This allows lenders to loan larger amounts through secured loans, but also means that they come at a greater risk for the borrower, and if they are unable to keep up with monthly repayments, it can result in them losing their home.
Although there are much greater risks with a secured loan, for those who are confident that they can make the monthly repayments and will not take out further debt while the loan is being repaid, it can be a good way to consolidate a high level of debt and reduce monthly repayments. Currently, the lowest rate in the secured loan chart is headline rate of 3.80% and a variable APRC of 5.8% being offered by Paragon Personal Finance on its Prime Rate Secured Loan, which has a maximum 75% loan-to-value (LTV). Taking a secure loan at £30,000 to be repaid over 10 years would result in 120 monthly repayments of £300.89 at the headline rate of 3.80%.
Another alternative for those looking to consolidate debts is to remortgage. Mortgage rates remain competitively low, so those coming to the end of their fixed rate deal, or who are already on their lender’s standard variable rate (SVR) could reduce their repayments by locking into a new deal. Increasing a mortgage can be a good way of acquiring the extra money needed to repay debts, but it is important to remember that the extra money will be added onto the mortgage, which will likely result in a higher LTV. As well as this, keep in mind that the length of the remortgage will likely be longer than that paid on an interest-free credit card or personal loan, which means that the cost of the debt will be higher overall. For example, a remortgage can last for a term of 25 years of more and interest will continue to be added during this time, whereas a personal loan will usually be repaid within five years.
Consolidating debt through remortgaging could be a good option for those who have suddenly seen a drop in income, for example having to take a pay cut, as it may help to reduce monthly outgoings in the short-term, but, as long as it is allowed in the terms and conditions of the remortgage, overpayments and/or shortening the length of the mortgage term is a possibility if the borrower’s income increases.
Currently, the lowest rate in the remortgage chart is HSBC, which offers 1.14% (3.2% APRC) fixed until 31 December 2022 at a maximum LTV of 60%. As an example, this deal would allow someone with a property valued at £250,000, who had 55% equity in their home, so had £112,500 remaining on their mortgage, to increase the LTV by 5% – adding an extra £12,500 onto the mortgage. The £12,500 can be used to repay the debts and would result in £125,000 left on the mortgage. At the rate of 1.14% on a term of 15 years, this would be £755.84 in monthly repayments.
When deciding to remortgage to consolidate debt, it is important to include the exit fee if already tied into a mortgage deal. For those in the middle of a fixed term deal, the exit fee may make it too expensive to consolidate debts using this option.
Those in this situation could consider speaking to their mortgage lender for a further advance. A further advance is borrowing money on top of the original mortgage. Not all lenders allow a further advance and, if they do, they may not allow it to be used to consolidate debts. Borrowers should also be aware that, if accepted, it will involve repaying an additional debt alongside their mortgage repayments. Borrowers considering a further advance should also be aware of the rate that will be charged. At the moment, there are rates from as low as 1.14%, but some lenders may offer their SVRs, which can be over 4%. Again, as with a secured loan, it is important that the borrower is confident that they can make the repayments on both the original mortgage and the further advance repayments or they could risk losing their home.
When applying for a credit card, loan or remortgage to consolidate debt, your credit rating will impact whether you’re accepted and what deal you will be offered. You can check your credit rating for free here. For tips on how to improve your credit score, read our guide 8 ways to improve your credit score.
Debts can quickly escalate, which is why borrowers should always have a repayment plan in place before taking on any type of debt. Those who are struggling to repay debt should seek help as soon as possible. Citizen Advice and free debt charities such as StepChange, offer services that provide advice and support to those struggling with debt.
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