What consolidation is
A consolidation loan is a new personal loan large enough to repay your existing debts, so that one instalment replaces several. The credit-card balance, the store credit and the older loan are settled from the new loan's proceeds, and from then on you owe one lender one amount at one rate. Nothing is forgiven; the debt is refinanced.
Lenders like the product because it brings a whole customer across. Borrowers like it because one payment is easier to manage and the headline rate is usually lower than a card's. Both can be true and the loan can still cost more.
The one test
Add up what you would pay in total on your existing debts if you kept them to the end: instalments times months, for each. Then take the consolidation offer and do the same: monthly instalment times term, plus any arrangement fee, plus any compensation your current lenders charge for early repayment. If the second number is smaller, consolidation saves money. If it is larger, it buys convenience at a price, and you should know the price.
The comparison on APR alone misleads, because the new loan often runs longer than the debts it replaces. A lower rate over a longer term can cost more in euros. Total repayable is the figure that settles it.
What leaving your current lenders costs
Under the Consumer Credit Directive you may repay a consumer loan early at any time, and the lender may claim compensation only for a fixed-rate loan, capped at 1 percent of the amount repaid, or 0.5 percent if less than a year remains. Credit cards and credit lines carry no such compensation. Check the fee in the new loan too: an arrangement fee of a few hundred euros is common and belongs in the test.
The trap
Consolidation clears the cards. It does not close them. If the limits stay open and the balances creep back, you end up with the consolidation loan plus the cards again, which is the situation the product was meant to fix, only larger. The people for whom consolidation works are those who close or cut the limits on the day the old balances are paid and treat the new instalment as the only credit they carry.
The alternatives
If the test fails, the cheapest route is usually to keep the loans and pay extra on the one with the highest APR first while paying the minimum on the rest, which mathematicians call the avalanche method. A balance transfer to a card with a promotional zero rate can work for disciplined borrowers who repay within the promotional period; after it the rate jumps. And if the instalments are not affordable at any rate, the answer is not a new loan but debt counselling.
Where free help exists
In the Netherlands every municipality offers free debt assistance, schuldhulpverlening, which can negotiate with creditors and lead to a statutory restructuring. In France the Banque de France's household over-indebtedness commissions can impose a repayment plan or write off debt, free of charge, in every department. In Finland the municipal financial and debt counselling service, run by the legal aid offices, is free, and the Guarantee Foundation can guarantee a consolidation loan from a bank for people who would not get one otherwise. None of these is a last resort to be ashamed of; all of them work better the earlier you go.
Summary
Consolidate when the total repayable falls and you close the credit you replace. Keep the term as short as the instalment allows. If the numbers do not work, pay the most expensive debt first, and if the instalments do not work at all, use the free counselling your country provides before taking on anything new.
