About loans consolidation

Loan consolidation, or refinancing, means taking one new loan to pay off several existing ones. Instead of several payments to different lenders on different dates, you are left with one contract and one monthly payment. Done well, it can lower your costs and make your finances easier to manage; done badly, it can make the debt more expensive and longer. Lenders offering it are listed under loan refinancing.

When consolidation makes sense

Consolidation pays off when the total you will pay on the new loan, including all fees, is lower than what you would still pay on the old ones. This is most likely when you have expensive debts, such as fast loans, credit card balances or store credit, and can replace them with a cheaper consumer or bank loan. It also helps if keeping track of several payments has led to missed or late payments.

Example: lower payment, higher cost

You have three loans with a total remaining balance of 8,500 euros, on which you pay 420 euros a month for another 24 months, so 10,080 euros in total. A lender offers to consolidate them at 12% a year with an arrangement fee of 150 euros.

Over 24 months, the new payment is about 400 euros and you repay about 9,750 euros including the fee: you save around 330 euros.
Over 48 months, the payment falls to about 224 euros, which looks attractive, but you repay about 10,900 euros: around 820 euros more than if you had kept the old loans.

The lesson: compare the total amount payable, not the monthly payment, and choose the shortest term you can comfortably afford.

How to consolidate step by step

1. List your debts. For each loan, note the remaining balance, the rate, the monthly payment, the remaining term and whether early repayment carries a fee.

2. Work out the current total. Add up everything you would still pay if you kept the loans until the end.

3. Ask for offers. Apply to a few lenders or use a broker, and compare the APR and total amount payable for the same term.

4. Include all costs. Add the arrangement fee of the new loan and any early repayment compensation on the old ones.

5. Close the old credit. Make sure all old loans are fully repaid, and consider closing credit cards and credit lines so that the old debts do not build up again.

What to watch out for

Consolidating unsecured debts into a loan secured by your home can lower the rate, but it puts your home at risk for debts that were not secured before; see Loans with collateral. If you are already in arrears or your debts exceed what you can repay, a new loan rarely solves the problem: contact your lenders to agree new payment schedules, and look for free debt advice, which is available in most European countries.

Frequently asked questions

Can I consolidate with a bad credit history?
It is harder, but some lenders consider applications if there are no current arrears and your income is sufficient. See Bad credit history.

Does consolidation affect my credit history?
The new loan and the repaid old ones are recorded in the credit register. Paying the new loan on time gradually improves your history.

Can I include a mortgage?
Usually consolidation covers unsecured debts. Refinancing a mortgage with another bank is a separate process with its own costs.