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Debt consolidation (Scotland)
This fact sheet covers Scotland. We also have a version for England & Wales if you need it.
This fact sheet explains about debt consolidation, and the different sorts of credit that might be available to you. It will help you decide if you should borrow more money and tell you where you can get the advice you need.
Use this fact sheet to:
- understand what you should think about before borrowing money;
- work out if you should consider consolidating your debts;
- see what different types of credit might be available to you; and
- find the right kind of debt solution for you.
Debt consolidation is where you take out new credit, such as a consolidation loan and use the new credit to pay off your existing debts in full.
Taking out more credit is usually not a good option if you are struggling to pay essential bills, or are already missing payments on your debts. Debt consolidation loans can seem like a good solution, but can sometimes just lead you further into debt.
There are different ways of borrowing. Depending on your situation, some may be better for you than others. This fact sheet explains the differences between various sorts of credit that you can get.
Budget before you borrow
Before deciding to take out credit, or consolidate your debts, you should complete Your budget.
You need to work out how much money you have left after paying your day-to-day living costs. Your budget will help you to see:
- whether you can afford the payments on your existing debts; and
- how much you can afford to pay towards any new credit you take out.
Make sure your budget is accurate and update your budget whenever there is a change in your circumstances. If you take out credit but cannot afford the payments, you can end up having to pay back a lot more than you originally borrowed. If you are not sure if your figures are realistic, contact us for advice.
Be money smart
Don’t overlook any savings that you could make in your budget. Take a look at MoneyHelper’s Everyday money - Budgeting information for advice on how to save money on your everyday household bills. It could make your money go further today and save you money in the future too. Take a look even if you can afford to pay your debts each month
Should I consolidate?
I can afford my current payments
If you can afford the payments on your debts each month and have not fallen behind with any of your payments, you will not need debt advice from us. However, you may still need help and advice, especially if you can only afford the minimum payments or if the interest repayments on your debts are high.
It is always a good idea to get independent advice before you borrow money. MoneyHelper can give you free general advice about credit. They can also help you find suitable independent financial advice if you need it. Go to www.moneyhelper.org.uk or call 0800 138 7777 for more information.
A consolidation loan can sometimes lower the monthly amount that you need to pay towards your debt. In some situations, this may also mean that you have extra money available to spend each month on things you choose to, such as holidays and gifts. However, some consolidation loans may take you a longer time to pay back than your original debt. This can make some consolidation loans more expensive in the long term than your current debt.
If you are considering applying for a consolidation loan, always check the following.
- Look at the overall cost of the loan, as well as how much you will pay each month. This is important because if you miss payments on a consolidation loan, the lender could ask you to repay the loan in full, including all the interest that would have been paid by the end of the agreement. You could owe a lot more money than you would have done if you hadn’t consolidated your debts.
- Check the interest rate you are being offered. Some consolidation loans can have higher interest rates than other types of loan. Also, a lender’s best deals are usually only available to people with the highest credit ratings. This means that you may be offered a consolidation loan at a higher interest rate than expected.
- Make sure you are getting the best deal you can by shopping around. See Shopping around for credit on the net later in this fact sheet.
There may be other cheaper and quicker ways of clearing your debts. We have listed a couple of examples in the next section. We also suggest that you get independent advice before you take out new credit.
Look for better deals
If you have a credit card debt, it might be cheaper to move your existing debt to another credit card with a lower interest rate or to one that offers a zero% interest deal. This is called a balance transfer and you may have to pay a fee to complete the transfer.
Always check how long the new credit card deal will last for and make sure that you can afford the payments. Most zero% interest deals only last for a number of months. This means that you will start paying interest again at the end of the term, unless you pay the debt off in full beforehand or move the balance to another zero% interest deal. Also be aware that a lender may be able to end a zero% interest deal early if you fall behind with your regular payments.
Shop around to make sure you are getting the best deal you can. Remember that a lender’s best deals are usually only available to people with the highest credit ratings. For information about price comparison sites, see Shopping around for credit on the net later in this fact sheet.
If you decide to apply for credit, this will show as a ‘search’ by the lender on your credit report. Searches for applying for credit stay on your file for different times depending upon which credit reference agency was used. If you have lots of searches on your file, this can make it harder to take out credit or stop you from getting the best deals.
Paying off some debts more quickly
If you can afford the payments on your debts each month and have extra money available, you may want to consider paying extra towards some of your debts each month. It will usually mean that you will pay less later.
It will usually save you money if you pay extra towards your debts with the highest rates of interest first. Although, be careful not to forget about any debts that have limited interest free periods, such as zero% interest credit cards or buy now pay later agreements. If you have these debts and do not pay them off in time, you might end up owing more money.
Instead, you may want to focus on repaying your smallest debts first. While this can be more expensive for you, it can mean that you see results more quickly. This is because you won’t have to wait as long to see some of your debt paid off in full. This could help motivate you to stick to your budget and repayments.
MoneyHelper has a range of online calculators that can show you long it will take to repay your debts. The Credit card calculator also shows you how paying extra each month will reduce the amount of interest you are charged overall and the time it will take to clear your debt. See Shopping around for credit on the net later in this fact sheet.
Make sure you can afford any extra payments
It is important that any extra payments you make to a creditor do not cause you to fall behind with payments to another creditor. If this happens, you could be seen as showing ‘preferential treatment’ to one or more of your creditors. If you struggle to pay your debts in the future, preferential treatment of a creditor may be taken into account if you enter particular debt solutions. For example, if you enter into a trust deed and have not treated all your creditors fairly, the trustee may try to reverse any payments made to your creditors if the trustee considers they were preferential.
Always complete a realistic budget before you make any extra payments towards your debts. If you are not sure whether your figures are realistic, contact us for advice.
Some loan companies may offer you a consolidation loan but want to secure it on your home. This means that the loan becomes a second mortgage on your home, and puts it at risk. Your home can be repossessed if you cannot keep up the payments. Get advice first.
If you cannot meet your monthly payments
We do not generally recommend borrowing more money if:
- you cannot afford to pay your existing debts; or
- you have missed payments and have received default notices for some of your debts.
To consolidate your debt, you will have to borrow enough to pay off your existing debts and you will also have to pay interest on the new agreement. If you default on the consolidation loan, you will normally be asked to pay back the amount you have borrowed, plus the interest that would have been added throughout the term of the new loan. You can end up in a lot more debt.
If you have missed payments on your current debts, your credit rating will usually have been affected. This means that you will miss out on the best deals, and may be offered higher rates of interest if you apply for more credit. You may even be turned down for credit.
There may be other way to deal with your debt situation. For example, creditors may agree to freeze the interest on your debts if you make affordable offers of payment, or if you cannot afford to repay your debts in full, you may be able to get some of the debt written off. For more information, see Ways to clear your debt fact sheet or contact us for advice.
Borrowing to buy
Lots of people take out credit for all sorts of items such as buying a new car or a new sofa. Working out your budget will help you find out how much you might be able to pay on a monthly basis. Think carefully about what you can afford, and shop around for the best deals.
If you already have debts that you are finding it hard to pay, taking out more credit might mean missing payments on your on-going household bills and your other debts. If you are already struggling with payments, contact us for advice.
Taking out more credit
Taking out credit is not usually a good option if you are struggling to pay essential bills, or are already in debt. Below are some practical tips to consider before borrowing money.
- Make sure you know how much the credit will cost. Most forms of credit are expensive. If you feel the only way to afford something is to spread the cost by taking out a loan, be very careful to shop around for the best deals.
- Check the interest rates on offer and compare different forms of credit to see how much you have to pay in total over the whole borrowing period.
- The interest charges on credit are called the 'Annual Percentage Rate' or 'APR' This tells you how expensive the loan will be. Generally, the APR will be higher than the quoted interest rate and will show the true cost of the credit.
- The longer you take to repay, the more interest can be added, so always try and pay things back as quickly as you can.
Types of credit
You may be able to get a credit card that has an interest free period and allows you to transfer the balance of your current credit card to it. This can be a good option if you can pay the whole debt within the interest free period allowed on the card. You need to check the cost of transferring any credit card balances as most companies will charge an initial percentage of the debt to make the transfer.
You can also use a credit card to purchase items. If you can pay the whole debt within the interest free period allowed on the card, this can be a good option. If you cannot repay the full amount in one go, you will be charged interest on the balance each month. This may be very expensive. Making the minimum payment on a credit card might be tempting, but it means your debt will decrease very slowly and could take years to pay off. Always clear as much of the balance as you can afford. This is also important because only making minimum payments can affect your credit rating, affecting your ability to borrow in the future. Shop around for cheaper deals on credit cards.
If you think you are going to need an overdraft, try to arrange this with your bank or building society in advance. If the overdraft is agreed, you will know how much you can spend from your account. An overdraft that is agreed in advance is often called an 'authorised overdraft'.
The amount of interest charged on overdrafts can vary between different banks and building societies, so shop around for the best accounts.
- Check the balance on your account regularly so you know how much you have spent.
- Try not to 'live' in your overdraft and aim to keep the account in credit when possible.
- Overdrafts are repayable on demand. This means a bank can ask you to pay the whole amount back in one go if they choose to.
Banks and building societies can no longer charge more for an unauthorised overdraft than they charge for an authorised overdraft.
A payday loan is a type of cash loan that is normally paid into your bank account. They are called 'payday loans' as they are intended to be short-term loans and meant to be paid back when you next receive your wages or benefits.
The interest rates are usually very high, so it can be easy for the debt to get out of control if you can't afford to repay on time.
For more information, see our Payday loans fact sheet.
Instant credit 'buy now, pay later'
It can be very tempting to take out credit, perhaps for a bargain in a sale, which you don't have to make payments on for many months. Be very careful. Fill in a budget to make sure that you can afford the future payments you will have to make under the credit agreement. Build in the future payments to make sure you will be able to afford them.
If you are offered interest free credit, check that the credit is really interest free. Some agreements say in the small print that interest will be added as soon as a payment is missed or after the promotional period has ended.
Doorstep credit or catalogues
The interest on cash loans or catalogue goods can be high but tends to be 'hidden' because you may only look at your weekly payment amount rather than the APR being charged. Compare the total cost with the price you would pay for the same item in shops or online. You can find out what credit is available locally and how much it costs on the website www.lenderscompared.org.uk. The website also has information about the availability of credit unions.
Rent to buy
This is a type of hire purchase agreement. With rent to buy you won't own the goods until you finish paying. This means you can't give or sell the goods to someone else, and the lender can sometimes take the goods back if you don't pay. Interest can be high, but again may be 'hidden' if you only look at the weekly payment rather than the APR. Compare the price you would pay for the same item elsewhere.
For more information, see our Hire purchase debt fact sheet.
Some loan companies may ask you to get a friend or relative to be your guarantor. This means that if you miss payments, your guarantor will need to pay instead. Depending on the terms of your agreement, the guarantor may become liable to pay back everything that you owe, not just the payments you have missed.
If you are a member of a credit union, you can usually borrow at least two or three times the amount you have in savings, depending upon the loan policy of your credit union. A credit union will also normally pay out a dividend to you once a year. If you miss payments on a loan, the credit union may be able to use your savings to repay the loan.
'Local Exchange Trading Schemes' (LETS) are a 'money free' way of bartering goods and services. You can 'buy' goods using tokens and 'earn' tokens by providing a service back, e.g. babysitting or window cleaning. Check in your library for details of any local scheme or check the LETSlink UK website at www.letslink.org.
Payment protection insurance (PPI)
Check whether you can afford insurance to cover your payments if you fall ill or lose your job. Shop around to make sure you get the best deal.
Some insurance agreements have small print excluding you from cover if you are self-employed, or had a particular medical condition before you took out the agreement. Check the terms and conditions.
Be very careful of making agreements with illegal lenders or 'loan sharks'. Lenders must be authorised by the Financial Conduct Authority (FCA) or they are lending money illegally.
Don't be tempted to borrow from a loan shark as they will want repayment at a very high rate and you could fall behind on essential bills. Try every other option and contact us for advice.
Shopping around for credit on the net
Giving personal information to organisations on the web can be a risky business and could lead to unwanted contact later. Read the 'small print' and the content of the pop-up boxes before you confirm that you agree to terms and conditions. Think carefully before you give away any information on the net.
General, best buys, credit cards and personal loans
MoneyHelper's 'Everyday’ section
The ‘Everyday' section of the MoneyHelper website gives a range of advice, information and helpful guides about managing your money. The ‘Budgeting’ section has useful advice on making your money go further by finding the best deals for your household bills.
MoneyHelper's 'Money troubles' section
The 'Money troubles' section of the MoneyHelper website gives a range of advice, information and helpful guides about the different ways you can pay off your debts. It also shows where to get free debt advice.
MoneyHelper's 'Tools and calculators'
The 'Tools and calculators' section of the MoneyHelper website includes a range of useful calculators to help you work out some of the figures you may need, such as a mortgage calculator, loan calculator and credit card calculator. It also has a tool for finding free debt advice.
The website gives information about credit cards, loans and mortgages. It also has guides and tools to help with calculations and comparisons of different financial products. The website was founded by Martin Lewis and joined the MoneySupermarket group in 2012.
Which? magazine website
Which? magazine's website has a 'Money' section with information on savings and investments, credit cards and loans, mortgages and bank accounts. Some areas of this website are for members only.
Moneyfacts magazine website
The website of the Moneyfacts magazine. Moneyfacts is independent and has sections on mortgages, credit cards, loans and bank accounts. It has guides and tools to help with calculations.
UK Finance website
The UK Finance website has guides to choosing and using credit cards, debit cards and pre-paid cards. There is also help about how to use payment cards in the UK and abroad and information about protection from fraud.
As well as the websites listed previously.
The Mortgage & Homes section of MoneySavingExpert.com
This section of the website includes a guide for first-time buyers and a guide to remortgaging and help understanding household bills such as home insurance.
The Mortgage & Property section of the Which? website
The mortgage microsite of the Which? website gives advice on finding a mortgage, best deals, first-time buyer help, buying and selling.
Independent financial advice
- Whether you need financial advice will depend on a number of factors. For information about what to consider, see the 'Do you need a financial adviser?' section of the MoneyHelper website. www.moneyhelper.org.uk
- For a list of independent financial advisers in your area, see the 'Choosing a financial adviser' section of the website www.moneyhelper.org.uk