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.
With secured loans, you offer an asset you own – usually your homeor car – 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 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 could face a court action if you fail to make repayments.
You can find out more about how credit scoring works here.
With secured loans, you offer an asset you own – usually your homeor car – 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 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 could face a court action if you fail to make repayments.
You can find out more about how credit scoring works here.
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.”
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.
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 Citizens Advice.
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 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. Some 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.
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.
No, it is usually paid to you and then you need to pay off each of your debts separately.
Yes, lenders will check your credit record when you apply for a loan.
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.
You may be charged a fee, and your credit record will be damaged. You could also receive a county court judgment (CCJ). Some lenders will ask you to repay the full balance of the loan.
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Dan Moore has been a financial and consumer rights journalist since the 1990s. He has won numerous awards for consumer and investigative reporting.
