How to consolidate your debt

Sainsbury’s Finance is expecting a rush of new business as consumers keen to reduce the amount they owe take out personal loans for debt consolidation.

The supermarket bank estimates that around one in three, or 157,000 personal loans worth a combined £1.5billion, will be taken out in the first three months of 2012 for this purpose.

Its findings also suggest that the average loan size taken out to consolidate debts is around £9,800. Steven Baillie, head of Sainsbury's Loans said: "Consolidating debts can make a big difference by making it easier to budget monthly outgoings.”

Sainsbury’s offers a Shopper Reward Loan on amounts of between £7,500 and £15,000 with a representative APR of 6.9%. It comes with a £100 Sainsbury's gift card and double Nectar points on Sainsbury's shopping and fuel for two years, which the supermarket bank claims makes it potentially more competitive than its standard loan with a representative APR of 6.1%.

Meanwhile, M&S is offering personal loans with a representative APR of just 6.0%.

However, with credit card firms offering the longest 0% balance transfer deals ever, is a loan really a better way to consolidate your debts?

The pros and cons of personal loans

For anyone trying to clear their debts, one of the main benefits of personal loans over credit cards is that they are for a set amount.

In other words, you cannot keep on spending as you could with a credit card, which often makes loans a better choice for less disciplined borrowers.

Unlike credit cards, personal loans also come with fixed monthly payments. This makes it easier to budget and also ensures that you make regular inroads into reducing your debt.

As the term of the average personal loan is between three and five years, the payments that someone with a lot of debt will have to make are also often lower than those he or she would need to make to clear the same amount on a 0% credit card.

However, with market-leading loans coming with a representative APR of 6.0%, you can still pay less interest by opting for a balance transfer credit card.

As most of the best deals on personal loans are reserved for those borrowing at least £7,500, those with debts of just a few thousand pounds, for example, will also need to increase their debt burden to take advantage of a low-rate loan.

The pros and cons of credit cards

The main advantage of consolidating your debts on to a balance transfer – or balance transfer and purchases – credit card, is that you can escape further interest charges.

Consumers with good credit ratings, for example, can pay no interest at all for close to two years thanks to the introductory deals from providers including Barclaycard and Halifax.

These offers do come with hefty balance transfer fees. However, those who believe they can clear their debts within a shorter time can also choose a balance transfer deal with a shorter 0% period and a slightly lower upfront fee.

Meanwhile, people who want to keep spending while taking advantage of an interest-free deal can opt for cards from Nationwide and Halifax offering 0% on both balance transfers and purchases – although the Nationwide card is only available to current account customers.

The disadvantages, as alluded to above, are that it can be tempting to reduce your monthly payments to free up some extra cash – meaning that you pay your debts off more slowly. This means your debt balance could go up rather than down which is not the objective.

Should you fail to clear your balance in full within the interest-free period, you will also need to switch to a new deal (and potentially pay another balance transfer fee) to avoid incurring typical representative APRs of around 18%.

The best deals

If you are looking for a personal loan to consolidate your debts, the current market leader is M&S with a representative APR of 6.0% on amounts of between £7,500 and £15,000.

MoneySupermarket figures show that someone borrowing £10,000 over four years with M&S would pay a total of £11,238. The cost of the loan would therefore be £1,238, while the monthly payments would be set at £234.12.

Other loan providers worth considering include Tesco and Sainsbury’s, both of which have representative APRs of 6.1% on borrowing between £7,500 and £15,000.

Under these terms, someone borrowing £10,000 over four years would repay a total of £11,259 in monthly instalments of £234.56. And if you regularly shop in Sainsbury’s, it may be worth considering the Shopper Reward Loan mentioned above.

If, on the other hand, you would prefer a 0% credit card, HSBC’s credit card for existing customers is currently offering the longest interest-free period of 23 months, subject to a balance transfer fee of 3.3%.

This card, which has a representative APR of 17.9% (variable), is only open to HSBC current account customers. However, Barclaycard’s Platinum credit card with extended balance transfer also offers a generous 22 months at 0% (subject to a fee of 2.9%) and is open to transfers from all non-Barclaycard cards. It too has a representative APR of 17.9% (variable).

Balance transfer cards with lower fees, meanwhile, include the Virgin low fee balance transfer credit card, which offers nine months at 0% with a fee of just 1.5% and a representative APR of 16.8%.

Despite its higher representative APR of 18.9% (variable), Barclaycard’s Platinum balance transfer card with low fee is also attractive at 16 months interest free subject to a fee of 1.6%.

Finally, for those looking for a great deal on both balance transfers and purchases, Halifax All in one offers 15 months at 0% on both (subject to a 3% balance transfer fee) and has a representative APR of 17.9% (variable).

Anyone with a Nationwide current account could also take advantage of its Select card, which gives you 17 months at 0% on balance transfers (with a 2.95% fee) and 18 months at 0% on purchases. The representative APR on this card is just 12.9%.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct. We’re free, independent and compare all UK credit cards, as well as offering exclusive deals you can’t get anywhere else. Contact at Moneysupermarket House, St David’s Park, Ewloe, Flintshire, CH5 3UZ. © Ltd 2011.

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