What is debt consolidation?

Debt consolidation is when you combine multiple debt, like credit card bills, by taking out a single loan at a lower interest to pay them off. It's a way to reduce your debt and reorganise it to make it easier to manage and affordable to pay off.

For example, if you have three loans and two credit cards that total 15,000 in debt, you could get a single 15,000 loan to pay them off.

How does debt consolidation work?

There are two ways to consolidate debt, both of which concentrate your debt payments into one monthly bill:

  1. You can get a 0% interest, balance-transfer credit card: Transfer all your debts onto this card and pay the balance in full during the promotional period.

  2. Get a fixed-rate debt consolidation loan: Use the money from the loan to pay off your debt, then pay back the loan in instalments over a set term.

What is debt consolidation loan?

Like any other loan, a debt consolidation loan is available in two forms:

Unsecured loan: This is a personal loan that does not require an asset to act as a security for the loan.

Secured loan: This is a loan in which you attach an asset, like your car or home, as security for the loan. If you're unable to repay your loan, the provider can repossess the asset to sell it and recoup the loan.

Most personal loans can be used for debt consolidation, but it's important to check with your provider before you take out a loan.

What are the pros and cons?

  • Reduce your monthly payments

  • Could be cheaper to pay off

  • Only owe money to a single lender

  • Could take longer to pay off

  • May have to pay fees

  • Could cost more in the long run

What debts can be consolidated?

You can consolidate any debts that can be paid off early, including:

  • Credit cards

  • Loans

  • Tax arrears

  • Debt collection agency debt

  • Overdrafts

  • Payday loans

  • Bailiff debt

  • Outstanding utility bills

What is a debt consolidation loan?

This is a personal loan you can use to pay off your debts; there are two main types:

  1. Secured: Where the loan is secured against something you own, often your home.

  2. Unsecured: Where the lender has no claim on your belongings or property.

Most personal loans can be used for debt consolidation but double check before you apply because not all do.

Are there any better alternatives?

Yes, there could be, so shop around and compare your options before you apply for a debt consolidation loan. Look at these other options first:

When should you consolidate your debts?

Consolidating is not always the best option, especially if it will increase how much money you owe or make your payments unmanageable.

You should only consolidate if the solution you have found is:

  • Still affordable each month

  • At a lower interest rate

  • Does not extend your loan term unnecessarily

Check the total cost

The best way to work out if consolidating will save you money is to work out the total cost of your existing borrowing vs. the total cost of consolidating your debts.

For example, if you owe 10,000 in total spread over two loans and a credit card here is how consolidating could work:

  • 5,000 loan charging 11.9% APR with 3 years left to pay. Paying 164.40 a month, total cost 5,918.27.

  • 3,000 loan charging 7.9% APR with 1 year left to pay. Paying 260.45 a month, total cost 3,125.39.

  • 2,000 on a credit card charging 18.9% APR, which will take 2 years to pay off. Paying 100 a month, total cost 2,380.

All three added together would give you:

  • Total monthly payments = 524.85

  • Total cost = 11,423.66

If you borrowed 10,000 to pay off these debts over three years at a rate of 3.9% APR the new amounts would be:

  • Total monthly payments = 294.49

  • Total cost = 10,601.75

In this example consolidating would reduce your monthly payments by 230.36 in the first year and over the three years save you 821.91 in interest charges.

How to consolidate your debts

If you have decided to consolidate your debts follow these steps:

  1. Work out how much you owe: Add up your outstanding debts by checking the balance for each and if any charges apply to get an accurate figure.

  2. Choose between secured or unsecured: If you need to borrow over 25,000 you may need to choose a secured loan, otherwise pick unsecured.

  3. Decide how long you need to pay: Try to avoid extending your borrowing for any longer than you need because it will cost more.

  4. Look for the cheapest interest rate: Rates vary depending on how much you need to borrow and for how long, so this should be your last step.

Applying for the loan

Once you have found the right loan, or have chosen another way to consolidate your debts, you need to apply for the new borrowing.

You need to show that you can afford the monthly payments, but if your loan is for debt consolidation you can usually specify this during the application.

This means you do not need to include the payments you make to your existing borrowing when giving details of your bills.

What happens next?

Once your application has been approved you need to set up the payments on your new loan and arrange to pay off your old borrowing.

One of the biggest risks facing borrowers who have consolidated their debts is that they take on more short term borrowing, increasing how much they owe, so try to avoid this.

What else can you do?

One of the best ways to cut your debts is to spend less and free up more of your money to pay off what you owe.

Writing a budget that covers all your income and outgoings is a good place to start and you can use our ultimate financial checklist to find more areas you can save.

Debt consolidation FAQs


Can I get a debt consolidation loan with bad credit?


Yes but it may cost more. If you took out your existing loans before you had bad credit they may be cheaper.


How many debts can I consolidate?


As many as you like. If you can borrow enough to pay off what you owe there is no limit to the number of debts you can consolidate.


Will a debt consolidation loan affect my credit score?


Yes, your debt consolidation loan will appear on your credit record, but once you have paid off your old borrowing those loans will show as settled.


Are my debts paid off automatically?


No, you will be sent the money and will then need to pay off each of your debts using the money.


Who can get a debt consolidation loan?


As with all loans the lender will check you can afford the payments and your credit record before you apply.