The perils of consolidating debts

Blodyn82

Hi everyone, I know this has been discussed many times on this forum but I just wanted to share my experience of consolidating debts. In March 2023 I will pay the last payment of my £15,000 loan which I took out 5 years ago. I remember at the time thinking this will solve all my problems, it will be one payment a month- happy days. I remember the relief I felt at the time that 'it would be over'. This of course was not the way it went. I was lucky enough to get a good rate, at 3.1%, but it didn't quite fit all my debt and more importantly I hadn't explored the reasons I was in debt in the first place and budgeted properly for spending. So, 5 years later and I'm happy to say that the last payment to the lone will be soon, but more importantly I still have around £14,500 of debt on credit cards. So near enough in the same position I was 5 years ago when I got the lone out! I'm glad to say that I found this forum and had my 'light bulb moment' in July 2020 and now have a plan! My debt is going down slowly, but more importantly I can track my spending and am more aware of what is going where. 

I hope this is helpful to anyone thinking of consolidating. It can work for some people, but not of itself. It's so important to know why you are in debt in the first place and make a plan as to how you are going to change your spending habits and mindset. I still have a long way to go, but at least now I feel more in-control of the situation. 

x

fatbelly

Good post!

RAS

Thank you.

It really does underline why consolidation loans don't work unless they are twinned with a ruthless understanding of the underlying reasons for the debt, and action to resolved those issues.

kimwp

Thank you for sharing your experience, that's really kind and thoughtful.

EssexHebridean

Excellent post - and that must have taken a god bit of courage to lay yourself bare like that too OP - so thank you.

It's the reason why we strongly advise "going through the process" - because the initial worry around getting the defaults (or the effort in shuffling debt to 0% if that is still possible), the time taken setting up a payment plan, and then the slog of month on month chipping away and seeing the balances slowly fall, focuses the mind. By going through the process you get given time - to come to terms with the situation, to understand why the situation has occurred, and to learn the lessons (budgeting, stepping back from purchases, the differences between "wants" and "needs") that will help you to not get back into that position in the future. And it's also not going to be a pleasant process for many - turning down invitations because your entertainment budget is already spent, having to tell the kids no to a takeaway because its the final week of the month, you have everything you need in to make meals and the grocery budget only has slack in it for the 4 pints of milk and the loaf of bread you know are still required, and perhaps to facing several years without going on holiday because without reaching for the plastic, there just isn't the spare income there to pay for one. Again - that focuses the mind, it's not fun, but it IS useful.

Someone said on here very recently that consolidation shouldn't be dismissed as it can be a very useful tool for people - and this is something we have never denied here. Take the example of someone who has incurred debt through no fault of their own - being let down by a cowboy builder perhaps (that story will ring a bell with a few regulars) and ending up thousands of pounds in debt due to having no choice but to put things right. There's no option to balance transfer due to the amount of debt and the number of applications already made, but their current bank will offer them a loan so long as that clears down the credit card that they hold with them. If that person can shift multiple credit cards all at around 19% onto a single loan at  maybe 6%, then clearly that can save money. They were able to make the payments in the first place - but only just, and it allowed no slack for emergencies - switching to the loan gives them defined payments for a defined period of time. The work is now all done, and the credit cards have long since been cut up, and they will be able to build an emergency fund and also perhaps start saving towards clearing that loan early, too, while having payments that aren't just a hair away from the tipping point. The cause of the debt was clear and known. It was a one-off, and, more importantly, the person is not going to go ahead and continue to use cards alongside the new loan. It wasn't their failure to budget that caused the issue, it was a one-off, unforeseeable circumstance that ate their carefully saved emergency fund and then needing feeding further, and by a large sum.

There can be other circumstances where consolidation can work - but if you are considering it, and are already thinking that you'll hang onto one credit card "just for emergencies" then stop and think very, very carefully before you proceed - as all too often - and we have seen it repeatedly on here - the "emergencies" the one card gets used for ends up being things that should in fact have been budgeted for - new school uniforms come the beginning of the school year, the car needing new tyres, or a bit of a splurge at christmas. And then before you know it, you have the loan, plus further debt.

The situation the OP describes is also far from unusual - consolidation loans are sold all too often as the great saviour of the family finances - but nobody ever touches on what you should do if that loan being temptingly shoved at you turns out to not actually take account of the whole of the debt. 

They CAN work, but mostly - they don't, and that is why we err on the side of urging extreme caution and, ultimately, usually tell folk that they aren't for them. They are certainly NOT for someone only recently arrived at their lightbulb moment, and without even having worked through the first step of creating a budget, as in the recent case we saw here! 

kimwp

I think consolidation fails when it's seen as the whole solution to a debt issue by providing relief in the form of lower debt payments. The likely result is then for that debt to be paid over a longer time (therefore costing more), while outgoings creep up to former levels. If it's used to lower the cost of the debt while learning to budget (perhaps by keeping outgoings at the same rate and paying off the lower rate debt over a shorter period), then it would be a good thing. The reality is that most people only change their habits when there is a need to, so they need to continue in a situation of finances being (manageable, but) tight so there is a need to learn to manage within their income.

Same for 0% credit card deals or shifting to a lower credit card rate.

EssexHebridean

kimwp said:

I think consolidation fails when it's seen as the whole solution to a debt issue by providing relief in the form of lower debt payments. The likely result is then for that debt to be paid over a longer time (therefore costing more), while outgoings creep up to former levels. If it's used to lower the cost of the debt while learning to budget (perhaps by keeping outgoings at the same rate and paying off the lower rate debt over a shorter period), then it would be a good thing. The reality is that most people only change their habits when there is a need to, so they need to continue in a situation of finances being (manageable, but) tight so there is a need to learn to manage within their income.

Same for 0% credit card deals or shifting to a lower credit card rate.

Yes - this - and let's be honest, we've all seen it plugged as a way of increasing "spending money" haven't we! 

icarus_69

Wonder what you think about my situation, and whether it's worth consolidating my debts or keeping things as-is?

I am about 2k in my current account overdraft, which is charging me around £45 a month on interest.

Around £700 on a credit card, charging around £20 a month interest (excluding my minimum repayments of around £50 each month).

Also about £700 on PayPal Credit, charging £5 a month from interest (excluding £100 repayments each month).

And £10 interest per month for the £500 Monzo overdraft I'm in. 

So that's £80 a month on interest on average, and x12 is £960 per year. Now, I'm actually in a good place budget wise, and do feel it's coming down steadily.

However, I had a look at what I'd have to pay if I borrowed around £3500. Experian quoted me a loan from Admiral - 12 months repayment, 23.9% APR, £326.95 per month, and crucially the total interest for the year would only be £423.40 - almost half of what I'm currently paying on a yearly basis.

On the one hand, the loan does sound attractive as a way to consolidate things. But what do you all think?

SueP19

100% agree with you there, we have consolidated not once but 3 times, not worked on any occasion 

Addressing the reason you got there is the best way 

EssexHebridean

icarus_69 said:

Wonder what you think about my situation, and whether it's worth consolidating my debts or keeping things as-is?

I am about 2k in my current account overdraft, which is charging me around £45 a month on interest.

Around £700 on a credit card, charging around £20 a month interest (excluding my minimum repayments of around £50 each month).

Also about £700 on PayPal Credit, charging £5 a month from interest (excluding £100 repayments each month).

And £10 interest per month for the £500 Monzo overdraft I'm in. 

So that's £80 a month on interest on average, and x12 is £960 per year. Now, I'm actually in a good place budget wise, and do feel it's coming down steadily.

However, I had a look at what I'd have to pay if I borrowed around £3500. Experian quoted me a loan from Admiral - 12 months repayment, 23.9% APR, £326.95 per month, and crucially the total interest for the year would only be £423.40 - almost half of what I'm currently paying on a yearly basis.

On the one hand, the loan does sound attractive as a way to consolidate things. But what do you all think?

Best to start your own thread, and post an SOA, but as a very quick answer based on the info you've given - which excludes income information and  spending:
- First use an eligibility calculator to see if you can get a 0% balance transfer card for shifting the CC to - that's a no brainer. For that amount, you should be able to get a zero fee card too - look at those first.
- If stage 1 works, then look again for a special Money Transfer card - again you can get these with 0% periods, although I think they all come with a fee. If you can get approved, then see how much of the overdraft you can move across to that. If it'll give you a large enough credit limit then you can shift the PP credit balance too.

if you can get both of those in place then you could end up with all your debt on 0%.

That loan has a hugely high interest rate - the overdrafts are likely costing you more, but the CC probably isn't. PP credit varies - sometimes it has a BNPL element - you'd need to look.

If you follow the route above, then you MUST cancel the old CC, reduce the overdrafts to a "safety margin" level - maybe £100 per account - and cancel the PayPal credit agreement until such time as everything is paid off, and even more crucially, you are confident that you can use credit to benefit you, not benefit the lender.

Start that thread, get the SOA done and posted, and we can give you more personalised suggestions based on that. 

Martico

As above, this would be better to assess on its own thread, and with an SOA, so that we can see your total incomings and outgoings.

Taking on fresh debt at 23.9% seems reckless on the face of it. And your annual interest rate calculations assume that the interest you're currently paying will stay static - it won't, it will come down assuming that you've a "spare" (assuming that the £325 per month that the loan is tempting you with) is all the "spare" money you have to throw at the debt. You may be able to bring it down more rapidly with some of the solutions that EssexHebridean mentions, or simply by overpaying more if you're able to. The big danger of consolidation loans is that you end up with twice the debt you started with, and I'm sure you don't need me to warn you about flying too close to the sun.