Debt consolidation loans

This is particularly true with overdrafts which don't have structured repayments to clear the balance. It's the same story with credit cards if you opt to just pay the minimum monthly repayment, as your payments mainly service the interest rather than clearing the debt.

Personal loans are different, as payments are fixed and designed to clear the amount you owe by the end of the agreement, usually one to five years.

Before considering a consolidation loan, you first need to make sure that you're in a position to pay down the loan, and not run other debts back up.

If you already have multiple debts and generally struggle to stay on top of them, there's a risk that you could face similar difficulties when paying off a consolidation loan.

So for consolidation to work in the long term, there's often more of a 'lifestyle' shift or other compromises you need to make first, or at least alongside it. If you can't commit to this or you're not sure, it may be beneficial to seek debt help instead. Our Debt Problems guide has help to tackle spending, plus details of charities who can give debt advice if needed.

For some, debt consolidation can be a useful tool for managing and organising debt, where it's all in one place, and you know exactly how much you owe, what you pay each month and what the interest rate is.

However, crucially, as it requires more borrowing, it has the potential to lead to even more debt. As we said above, the key to debt consolidation is first tackling the reason you needed to borrow in the first place, and ensuring you're now in a position to avoid borrowing again. Otherwise, you could end up in the same position, with the new, bigger loan on top.

We've unfortunately had many people write to us explaining how debt consolidation loans have left them in a worse position than before – a stark warning to ensure you fully understand what a debt consolidation is before deciding to go ahead with one yourself. Below are some examples.

• Shift debt from existing credit card(s) to 0% with a balance transfer card.

  This involves getting a specialist new card that repays debts on other credit or store cards for you, so you owe it instead but at 0%.
  
  The exact 0% period varies per card, but top cards can offer up to around two years. You usually have to pay a one-off fee as a percentage of the amount borrowed, yet there are cards that have no fee, so you can sometimes even shift debt for free. Yet even if you do have to pay a fee, it'll likely be far, far cheaper than the interest you'd pay on your existing debt.
  
  See our Top Balance Transfer Cards guide for full info, including our top picks and our eligibility calculator which can show your acceptance odds before applying.

• Overdrafts or high-cost loans – use a 0% money transfer credit card loan to clear it.

  A few specialist cards offer a 0% money transfer that lets you pay cash into your bank for a small fee. You then owe the card instead but interest-free for a set number of months (typically around 12 months) which is usually much cheaper than paying interest on loans.
  
  Crucially, to get the cheap rate, never just take cash from an ATM. You'll need to ask your card provider for a money transfer. Full step-by-step help is in 0% money transfers.

• Work out how much you owe, then borrow only as much as you NEED to and repay it as quickly as you can.

  Add up the total debt you have on credit cards, overdrafts, catalogue debts, payday loans etc. Then, if you're paying off one or more loans, call your lender and ask for a settlement figure – as there can sometimes be early repayment charges. Add this to your total. This is the amount you're looking to borrow. No more.
  
  Next, work out how much you can afford to repay each month. Don't forget that once you have a loan, you won't need to make credit card minimum repayments as you'll be clearing the cards in full, so include any cash going to this too. Provided the amount you currently spend servicing your debt is affordable (and won't lead to more borrowing to supplement your income or lifestyle), this could be a good indicator of what you can afford.
  
  Once you know how much you need to borrow, and how much you can repay each month, you'll then be able to work out the loan term (the length of time you want to borrow for). Use our loans calculator to help.
  
  When using the calculator, always look at the total interest cost. A longer loan will give you a lower monthly repayment, but you'll pay more in interest as you're borrowing for longer. Similarly, the longer you borrow for, the less you'll save over your current debt costs.

• Use an eligibility calculator to check your chances of acceptance before applying.

  
  It's next a case of finding a personal loan that you'll be accepted for. Our Cheap Personal Loans guide has full help, things to watch out for and the cheapest rates available.
  
  Usually, applying is the only way to know if you'll be accepted for a loan. Yet that marks your credit file, affecting your ability to get future credit. To help, try our Loans Eligibility Calculator which uses a 'soft search' to find your chances of acceptance before applying. Some lenders will even give guaranteed rates (where a rate isn't guaranteed, you could be accepted but offered a higher interest rate after applying).
  
  If few loans are likely to accept you, revisit the cut debt costs section of our debt help plan guide as there are other options to try, including grants and the credit card shuffle.

• If accepted for a loan, use it to pay off all your debts which have a higher interest rate than the loan.

  If your loan application is accepted, the money will be paid into your bank account. Don't make the mistake of spending while your balance is artificially inflated. Use the money immediately to pay off your loans, cards and any overdrafts.
  
  Most providers will let you make payments online or by phone. Whilst paying off a loan closes it, paying off an overdraft or credit card doesn't – so it will remain available for you to use unless you request for the account to be closed. There's no right answer here, but if you think the idea of available credit will be too tempting, then it's best to close it, or cut up the cards (so you can access it, but only in absolute emergencies). See more on cancelling old cards.

• Ensure you make the loan repayments IN FULL and on time each and every month.
  
  Fail to do this and you'll effectively break the agreement, which could lead to penalty charges and missed payments marked on your credit report. If something later goes wrong so you can't repay, contact the lender as soon as you can and ask it for help.
  
  Always, always tell your lender as soon as you know you're not going to be able to repay. It does work. Be firm, make a fair offer of what you can repay and be willing to answer questions about your income and expenditure honestly.
  
  It should then offer you a fair and affordable way to repay, such as a structured repayment plan and the freezing of interest and charges.

Their job is to make money out of you, plain and simple. While in the short term their plans will make your payments lower, in the long run you'll end up paying far more.

Often companies like these will advertise debt consolidation as a quick fix that will solve debt problems and lift you out of debt instantly, which is not the case. Watch out for firms that charge upfront fees or consultation charges.

As we say above, if you have decided to consolidate your debt with a loan, the best way forward is to use our loans eligibility calculator to check your acceptance odds, without affecting your credit score. See our full guide on how to get a personal loan.