Debt consolidation: when it helps, and when it costs you more

The short answer

You take out one new loan, use it to pay out the others, and make one repayment from then on. The debts do not disappear. They are re-arranged into a single balance, commonly at a lower rate and commonly over a longer term.

The lower rate is the part you get sold. The longer term is the part that decides whether you are actually better off, because interest is charged on what you owe for as long as you owe it.

The ways people consolidate debt

There is no single product called debt consolidation. There are several routes, they cost very different things, and not all of them are open to every borrower.

The first two do not touch your home. The next two do, and that is the difference that matters most and gets mentioned least.

Be wary of companies that charge a fee to negotiate with your creditors or to arrange a formal agreement for you. Financial counsellors do much of the same work for nothing, and they are not selling you a product.

What it costs over the whole term

Interest is a function of two things: the rate, and the time. A consolidation almost always improves the first and almost always worsens the second.

That is how a lower rate could still leave you paying more. A balance with a few years to run, moved onto a loan with decades to run, keeps charging interest long after the original debt would have been gone.

• Ask for the total interest over the full term, not only the new monthly repayment
• Compare it against what you would pay by leaving the debts where they are and clearing them in order
• Check the term the consolidated portion would sit on, which is not necessarily the term of the mortgage
• Include the cost of the refinance itself, which applies whether or not the consolidation turns out to help
• Ask what the total becomes if you keep paying the old combined repayment rather than the new lower one

Run your own version before anybody runs one for you. The tools at /finance-calculators/ let you put a rate and a term against a balance and watch what the term does to the total, using your figures rather than an example built to make a point.

Turning unsecured debt into debt secured on your home

A credit card, a personal loan and a buy now pay later account are unsecured. Falling behind on them is serious and the consequences are real, and they do not include losing the house.

Roll those balances into a mortgage and that changes. The balance is now part of a loan your property stands behind, and it is governed by a mortgage contract rather than by the credit contract it came from.

• Debts that nobody could take your home over become part of a loan secured by it
• A missed repayment now sits against the mortgage rather than against a card
• Hardship arrangements exist on both kinds of credit and they are not identical, so ask what would apply before you consolidate
• The larger loan is reassessed against the property's value, and lenders mortgage insurance could re-enter the picture
• Selling later returns less to you, because more of the price goes to paying the loan out

What consolidating does not fix

Consolidation is a re-arrangement. It changes the shape of a debt and it changes nothing about how the debt came to exist.

That matters because the most common way a consolidation goes wrong is not the arithmetic. It is the cards being paid out, left open, and used again, so the household ends up carrying the consolidated mortgage and a fresh set of balances on top of it.

• Close the accounts at settlement rather than leaving them open at a zero balance
• Work out what the money was actually spent on before deciding a loan is the answer
• Test a budget against a real month you have already lived, not an optimistic one
• Put a small buffer aside first, so the next unexpected bill does not go straight back onto a card
• Agree with everyone in the household what happens if the balances start climbing again
• Set a date to review the position, rather than treating settlement as the end of it

None of that is finance advice and all of it decides the outcome. A consolidation done alongside a change in how the money is managed could work well. A consolidation done instead of one usually buys time and adds cost.

Where to get help, and where to go next

If the repayments are already unaffordable, if you are behind, or if you are borrowing to make minimum payments, a refinance is not the first call. Free financial counselling is, and it comes before anybody sells you a product.

We would give you the same answer. A broker whose response to unaffordable debt is always another loan is not giving you an answer, and there are files where the honest reply is that consolidating would make things worse.

If the position is stable and the question is simply whether consolidating stacks up, the pages below are where to look next.