With the household debt in the UK rising by 11% since 2016, consumers are struggling to pay back their credit card and hire purchase debt – many borrowers considering it a “burden”.
According to the Office for National Statistics (ONS), debts excluding mortgages saw an increase of £12 billion between 2016 and 2018. During the same time period, a total of 44% of the households reported seeing their borrowing as a burden. Debt consolidation with a personal loan can be a useful way to simplify the repayment process and lower your interest costs, making it more manageable.
The UK’s financial debt burden
According to the report released by the ONS, the total household debt was £1.28 trillion in 2018 – out of which 9% was non-mortgage debt. In relation to disposable income, this places the UK in the top ten for the most indebted households in the world, according to OECD. Others topping the list is Scandinavian countries such as Denmark and Sweden, as well as the Netherlands and Australia.
Consumption loans in Sweden accounts for 18% of the total household debt, which is twice as much as in the UK. Having said that, it is also important to consider the extent to which debt is a problem for households. In the survey by ONS, 14% of the people with financial debt such as credit cards and consumption loans considered it to be a “heavy burden” and 30% “somewhat of a burden”.
When debt consolidation is a good idea
Though consolidation is not a silver bullet for debt problems, it can make it easier to manage payments with multiple lenders. Taking out a personal loan to pay off your high-interest debts, such as credit card bills, will leave you with only one payment and one due date to keep track of.
Normally, personal loans will have lower interest rates than credit cards. This means that you can save money by reducing the interest cost and pay it off faster – or lower your monthly installments to give yourself a bit of breathing room. However, it is important that your credit score is good enough.
Multiple debts can do a number on your credit score, in which case it might not be possible to get a low-interest personal loan. It goes without saying that if you cannot beat your existing interest, you will not save any money by consolidating debt with a personal loan. The same can be true even if the interest rate is lower than your current one – if you stretch out the repayment period for too long.
A lower-interest personal loan with a longer repayment term than your current one, could result in you paying more interest over time – depending on your loan’s interest rate. Therefore, you should always compare interest rates and the total cost of different alternatives before consolidating.