Debt consolidation

This fact sheet gives information 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 a budget. This will help you to see:

• whether the payments on your existing debts are affordable; and
• how much you can afford to pay towards any new credit you take out.

The type of budget you need to fill in will depend upon how you are set up in business.

Sole traders and partners in a business partnership

If you are a sole trader, or a partner in a business partnership, complete a business and household budget.

The business and household budget will help you to work out how much income (net of income tax and National Insurance liability) you can take on average each month from your business. The budget will also help you to work out how much money you have left after paying your day-to-day living costs. Use My budget to complete your budget.

Director of a limited company

If you are a director of a limited company, the type of budget you need to fill in will depend upon whether you are taking out credit personally or for the company.

If you are taking out credit personally, complete a household budget. This will help you to work out how much money you have left after paying your day-to-day living costs. If you are taking an income from the limited company also speak to your accountant or bookkeeper to check:

• that the limited company is viable; and
• what the business can afford to pay you on average every month. You will need to include this figure (net of any personal tax and National Insurance liability) in your budget sheet.

Use My budget to complete your budget.

If you are taking out credit on behalf of the limited company, you will need to complete a budget sheet for your limited company. You may need to speak to your accountant or bookkeeper to do this. Our Limited companies fact sheet also includes an example budget sheet for limited companies.

Whichever budget you need to complete, always make sure that your budget is accurate and update it 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.

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.

For information about types of business finance available see Business finance help in the Shopping around for credit on the net section later in this fact sheet.

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 hobbies or advertising for your business. 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.

• Who will be liable for the debt, and how could any borrowing decisions you make affect you and anyone else you are in business with. See the later section, Extra things to consider if you are self-employed or running a business.
• 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 or businesses 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 the later section, Shopping around for credit on the net.

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 the 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 or businesses with the highest credit ratings. For information about price comparison sites, see Shopping around for credit on the net later in this fact sheet.

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 how 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 could limit the range of debt solutions that are available to you. For example, it may mean that applying for a debt relief order is no longer a viable solution for you.

If you are a director of a limited company and your company enters into formal insolvency proceedings, in some situations the preferential treatment of a creditor can be seen as a director’s offence. This can lead to a court order being made that makes you personally liable to pay money to the company.

Always complete a realistic budget before you make any extra payments towards your debts or your company’s debts. If you are not sure whether your figures are realistic, contact us for advice.

Extra things to consider if you are self-employed or running a business

Liability for debts

If you are self-employed or running a business and are considering debt consolidation, you will also need to consider:

• who is liable for the existing debt; and
• who will be liable for any new credit.

It is important to check liability so that you are fully aware of your personal responsibility for any business debt, and to make sure that you are not unintentionally paying towards debts that you are not liable for.

Sole traders. If you are a sole trader, you are personally liable for all the debts you have accrued through running your business or take out for your business.

Partners in a business partnership. If you are a partner in a business partnership, you will usually be jointly liable for the partnership’s debts (although this does not apply to personal income tax and National insurance liability).

Directors of a limited company. A limited company is a separate legal entity to its directors. This means that if you are a director, you are not usually liable for the limited company’s debts unless you have given a personal guarantee or acted inappropriately in your role as a director. 

The impact of business borrowing decisions

Partners in a business partnership. All partners have a ‘fiduciary relationship’ with the business partnership. This means that as a partner your actions, including taking out credit for the partnership, must be in the best interest of the partnership and the other partners.

• If the partnership was set up using a written partnership agreement, check whether the agreement includes information about who has authority to enter into agreements for the partnership.
• Be aware that borrowing decisions you make for the partnership will affect all of the partners. This is because joint liability usually applies for most partnership debts.

Directors of a limited company. A director of a limited company has a ‘fiduciary duty’ to act in the best interests of the company at all times. This means that as a director you have a legal and moral duty to do the right thing for the limited company. If you do not, your actions may be seen as an offence if your company enters into formal insolvency.

Formal insolvency includes proceedings such as, a company voluntary arrangement, administration, a creditors' voluntary liquidation and compulsory liquidation.

• If you are considering taking out new credit for the limited company, check that your company is solvent. See our Limited companies fact sheet for more information.
• If you are applying for credit, or signing an agreement for your limited company, make sure that the creditor knows that you are signing for, and on behalf of, the limited company. You may need to have the agreement checked by a solicitor to make sure that you are not signing the agreement in your own name.
• Also check whether the new agreement includes a personal guarantee. If it does and you sign the agreement, you will become a ‘guarantor’ for the agreement. This means that if the company is unable to pay the debt, you can be made personally liable and asked to pay the debt.
• If the company is insolvent or likely to become insolvent, you also have a responsibility to act in the interests of the company’s creditors rather than in the interests of its shareholders. In this situation, you will need to carefully consider whether debt consolidation is the right action to take for the company’s debt. This is because if you increase the limited company’s debt when it is insolvent and unable to trade out of its debts, you may be committing a director’s offence. If the company enters into formal insolvency, you could be made liable for the debt.
• It can be tempting to take out credit in your personal name to consolidate your limited company’s debts. Think carefully before doing this. If you loan personal funds to your company and the business stops trading, you will still owe the credit personally.

Cash flow forecasts and business plans

If you are applying for business lending, potential lenders are also likely to ask you to provide a cash flow forecast and a business plan.

What is a cash flow forecast?

A cash flow forecast is an estimate of the how much money you expect your business to bring in and to spend in the future, for example, in the next 12 months. It helps potential lenders to work out whether any new lending is viable.

A cash flow forecast can also help you to plan ahead. When you complete a forecast, you should be able to see the times when you are more likely to experience financial difficulty. For example, there may be particular times of the year when your business is quieter and income reduces. You can then look at ways to compensate for this, for example by trying to negotiate better payment terms with your trade suppliers.

For a cash flow template, go to www.startuploans.co.uk/cash-flow-forecast-template.

What is a business plan?

A business plan describes your business goals and strategies for achieving them. It shows potential lenders how you plan to make a profit and make sure that your business is sustainable. A business plan also helps you to check you business’s progress and consider how to reduce any potential risks to your business.

For an example template and more information on how to write a business plan, go to www.gov.uk/write-business-plan.

If you cannot meet your monthly payments

We do not generally recommend that you borrow 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 ways 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 about dealing with your personal debt and debt you have accrued from being a sole trader, see our Ways to clear your debt fact sheet or contact us for advice.
• For more information about dealing with partnership debt, also see our Business partnerships fact sheet or contact us for advice.
• For more information about dealing with limited company debt, also see our Limited companies 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 household bills or 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

Credit cards

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.

Bank overdrafts

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.
• Aim to keep the account in credit whenever 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.

For personal current accounts, banks and building societies can no longer charge more for an unauthorised overdraft than they charge for an authorised overdraft.

Payday loans

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.

Guarantor loans

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.

Credit union

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.

LETS schemes

'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. baby-sitting or window cleaning. Check in your library for details of any local scheme or check the LETSlink UK website at www.letslink.org.

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.

Business finance help

General, best buys, credit cards and personal loans

Mortgage deals

As well as the websites listed previously.

Independent financial advice

Other fact sheets that may help you

Business partnerships fact sheet

Hire purchase debt fact sheet

Limited companies

Making the most of your money fact sheet

Payday loans fact sheet

Sole trader fact sheet

Ways to clear your debt fact sheet