Beginner's guide to: Consolidating debt

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The Independent Online

How does it work?

The theory is that, by putting all your debts in one place, you can save money on interest and time on making lots of individual payments. You can usually consolidate any unsecured loans including store and credit cards and personal loans, either as a do-it-yourself plan (take out a personal loan, pay off existing debts and gradually pay off the loan), or via a debt consolidation company.

Would it help me?

It depends on how much you owe and the rates you pay. If you have 0 per cent on credit cards and good rates on personal loans, it may be worth staying where you are if you owe a few hundred to a few thousand pounds that can be paid off quickly. Set up a standing order or direct debit to ensure you consistently eat into the debt. But if you have larger debts at higher interest, it may be worth moving them into one unsecured loan.

What's the catch?

Debt companies make money by charging interest. The higher the rate and the longer you owe them money, the more they get out of you. Your monthly payment may seem a pleasant surprise, but this means it'll take you a lot longer to pay the debt off. By the end, you could find you've paid an extra 30 or 40 per cent of the debt for the privilege. If you can arrange a personal unsecured loan yourself, and pay back as much as you can each month, the debt will fall quickly without punitive interest rates.

Who has the best deals?

Credit history, employment status, whether you own property outright, have a mortgage, or rent, and how long you want to pay the money back all affect the rate you pay on a personal unsecured loan. For small amounts, Abbey's personal loan, at a typical APR of 8.9 per cent, will cost you £94 in interest to pay off £2,000 over a year, at £174.49 a month. For larger debts, Tesco Loans is offering 8.2 per cent, also for those with a good credit history. A £20,000 loan could be paid back at £241.67 a month over 10 years, costing a total of £9,001 in interest.

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