Do cheap routers overload easily when there are many devices connected to it, and how do I fix it?

Here in the UK, everytime you sign up to an ISP they will provide you with a router to connect at home. These are usually cheap netgear home routers (the one I'm using is a DGN-1000SP) with a basic GUI firmware. With 3 people in the flat, we usually have around 6 devices (3 PC's and 3 mobile devices) but sometimes up to 10 as more devices/guests come into play.

However, I've noticed that the network slows down massively when the number of devices get to 8 or so. Logging into my router's GUI I notice that the list of attached devices keep changing; sometimes there are as little as 3 devices connected and sometimes all 6 are shown.

Is this because the router cannot handle all the simultaneous requests (hardware fault) or because the internet connection is too slow? The connection is ADSL with 5Mbps down and 1Mbps up.

What are some ways I could fix this? Will establishing another access point with my spare router, wired to the original access point but broadcasting a different wireless channel and throwing traffic to this router help if the problem is to do with hardware?

It's not the number of devices, it's the volume of data (cumulatively) and the threads from the programs in use. i.e. with a 5Mb connection, you can't all be watching video at the same time. But the router is able to process far more data than your relatively-slow DSL connection, and so your situation will not be helped by setting up another access point. What you'll have to do is accept that unless you get a faster connection, you may have to trade off who does those data-intensive things like watching TV online, at any given time.

After all, keep in mind that even that paltry router is designed to handle wired data at 20 times the speed of your current internet connection.

Many older/cheaper routers also have issues maintaining state for more than a certain number of connections for the purposes of NATing. This will come to a head if you run BitTorrent on one or a few devices.