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Organise and clear all of your debts, by moving everything you owe to one simple monthly repayment

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Last updated
January 10th, 2024

What is a debt consolidation loan?

Debt consolidation loans let you merge your debts by lending you a lump sum of money that pays off everything you owe to all your existing lenders. This means you’ll be left with just one monthly repayment to a single loan provider.

Debt consolidation loans can be used to pay off credit cards, store cards, overdrafts, buy-now-pay-later debt, and other personal loans.

The goal of a consolidation loan is to simplify your repayments, as well as hopefully reduce the amount of interest you pay each month. However, as many debt consolidation loans have long terms lasting many years, you may end up paying more interest overall.

How does it work? 

The first thing you’ll need to do is work out exactly how much you owe, by adding up any outstanding debts you have. This will show how much money you’ll need to borrow.

You’ll then need to compare loans to find the best provider for your needs. Ideally, you want to find a lower interest rate than you’re already paying on the majority, if not all, of your current debts.

Once you’ve found the right loan, you’ll need to use the money to pay off all your existing creditors. This will leave you with one simple monthly repayment to make, to pay off the debt consolidation loan. 

You should set up a monthly direct debit to ensure that you make each payment on time. Failure to repay the loan could negatively affect your credit score. If your provider allows you to overpay, and you have the funds to do so, this will clear your debt faster and save you money in interest payments. However, some providers will charge an early repayment fee, so check the terms carefully.

Types of debt consolidation loans

Secured loan

With secured loans, you offer an asset you own – usually your home – as security against your debt. This means the lender can repossess and sell the asset to get its money back if you can’t afford to repay what you owe.

As secured loans are less risky for the lender, they may be easier to get if you have a poor credit history.

Unsecured loan

Unsecured debt consolidation loans are not secured against anything you own. That means that there is no asset the provider can repossess to recoup their money if you fail to pay what you owe. This is more risky for lenders, so your credit score has more of an impact on whether you’ll be accepted for a loan and what interest rate you’ll pay. Typically, interest rates will be higher than with secured debt consolidation loans.

You can find out more about how credit scoring works here.

Types of debt consolidation loans

Secured loan

With secured loans, you offer an asset you own – usually your home – as security against your debt. This means the lender can repossess and sell the asset to get its money back if you can’t afford to repay what you owe.

As secured loans are less risky for the lender, they may be easier to get if you have a poor credit history.

Unsecured loan

Unsecured debt consolidation loans are not secured against anything you own. That means that there is no asset the provider can repossess to recoup their money if you fail to pay what you owe. This is more risky for lenders, so your credit score has more of an impact on whether you’ll be accepted for a loan and what interest rate you’ll pay. Typically, interest rates will be higher than with secured debt consolidation loans.

You can find out more about how credit scoring works here.

How to find a debt consolidation loan

Take the following steps to get the right debt consolidation loan for your needs:

Decide how much you need to borrow

Add up all the debts you want to pay off. Don’t forget to include any charges you’ll need to pay to clear your debts early.

Think about how long you’ll need to pay it back

The longer you take to pay back your debt consolidation loan, the lower your monthly payments will be, but the more interest you’ll end up paying overall.

Look for the lowest interest rate

This will keep the cost as low as possible. Lenders advertise their representative APR, which means they’ll give this rate or a lower one to at least 51% of borrowers. The rate they offer you could be higher or lower depending on your credit history and other factors.

Pros and cons

Pros

They can reduce your monthly payments
If you can pay the debts off faster, you’ll pay less interest
You’ll only owe money to a single lender

Cons

It could take you longer to pay off your debts
You may have to pay fees to take out the loan and clear your existing debts
They can cost you more in interest in the long run

How much debt can I consolidate?

The debt consolidation loans in our comparison table go up to £50,000, meaning that you can combine different debts and loans adding up to that amount.

You’ll find that most debt consolidation loans usually offer terms of between one and five years. However, some of the UK’s leading lenders will let you borrow for longer periods.

In general, longer loan terms are designed for borrowing a larger amount of money. Some lenders even cap the length of time you can borrow for if you’re only taking a smaller loan, for instance, less than £5,000. Different banks and building societies will set their own thresholds, so check the terms and conditions carefully before you apply.

Debt consolidation loans usually offer terms of between one and five years.”

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Get a debt consolidation loan

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Consider the loan amount, interest rate and any fees you might have to pay
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Choose a loan with the lowest interest rate and a term that’s long enough to make repayments affordable
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Fill out an application form with your personal and financial details
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How can I get a cheap debt consolidation loan?

It’s only worth doing debt consolidation if you can find a loan that gives a lower interest rate than you’re already paying cumulatively on your debts.

Our loan repayment calculator can help you to see how changing the interest rates and term length can affect your monthly payments and make the loan cheaper in the long run. By trying out options, you can see if debt consolidation is suitable for you.

When working out if a debt consolidation loan can save you money, make sure you take any early repayment charges on existing debts into account. If you don't do this, you could see your new loan end up costing you more than your old ones.

Alternatives to debt consolidation loans

A debt consolidation loan may not be your only option. Even the cheapest consolidation loans might not be the best way to clear your debt, depending on your situation. It’s sensible to look into alternatives as well.

And remember, if your debts are getting on top of you, or you don't have the best credit rating, you can get free debt advice from a range of charities in the UK, including StepChange, National Debtline and Citizen's Advice.

0% money transfer card

You can use 0% money transfer cards to move money into your bank account. Usually, you’ll have to pay a small transfer fee. And then you pay the lender back, interest free, over a set amount of time. Once the interest-free offer period ends, rates rise sharply, so you should make sure you have a plan to repay your debt before then.

0% balance transfer card

0% balance transfer cards are good for people with credit card debts. You move what you owe onto a single, new card, then you can pay that card back, interest free, over a set period. Most lenders charge a small fee, however, some are fee-free. Again, it’s important to pay the money back before the interest-free period ends, or you’ll start paying a much higher rate.

FAQs

Do I have to pay off all my debts with the loan?

No, you can choose which debts to pay off. However, if you keep any open, you have to show you can afford to pay them back alongside any new loan.

Will the money be paid straight to my other lenders?

No, it is usually paid to you and then you need to pay off each of your debts separately.

Will I have to pass a credit check?

Yes, lenders will check your credit record when you apply for a loan.

Will a debt consolidation loan affect my credit rating?

A debt consolidation loan is just like any other form of borrowing. As long as you keep up with the repayments, you’ll be fine. In fact, you’ll improve your credit score by lowering your debt in the long term.

Conversely, if you don’t keep up with the repayments, it will negatively affect your credit rating, so you need to make sure you find a debt consolidation loan you can afford. Applying for credit and getting rejected can affect your score, so it’s worth doing a soft check to see what you might be eligible for before you apply.

What happens if I cannot make my repayments?

You may be charged a fee, and your credit record will be damaged. You could also receive a county court judgement (CCJ). Some lenders will ask you to repay the full balance of the loan.

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About the author

Lucinda O'Brien
Lucinda O'Brien has spent the past 10 years writing and editing content for regional and national titles. She applies her industry knowledge to ensure readers can make confident financial decisions.

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