Debt consolidation loans explained
According to the Money Charity, the average household had £7,616 of consumer debt in December 2017. If you have several debts, you might want to think about comparing personal loans or homeowner loans to consolidate them into a single monthly repayment.
These types of loan let you turn multiple debt payments – credit cards, store cards, overdrafts or loans – into one convenient payment that can simplify your outgoings. They can be an especially good option if you can also reduce the total interest you could pay on any outstanding debt by finding a loan with a lower interest rate.
Frequently asked questions
What is debt consolidation?
Debt consolidation involves taking out one loan to pay off other loans.
This leaves you with just one debt and one monthly repayment, which might make it easier to manage your outgoings.
It could be useful if you’re struggling with repayments or want to make your life simpler by streamlining your outgoings.
Debt consolidation loans come in two forms: secured and unsecured.
To find out more, read review and compare secured loans and unsecured personal loans.
Here’s an example of how a debt consolidation loan could look over a 3-year period:
Amount borrowed (for 3 years) - £6,000
Representative APR rate - 6.1%
Annual interest rate - 6.1%
Monthly installments - £182.36
Total charge for credit - £564.86
Total to repay - £6,564.86
What is an unsecured debt consolidation loan?
When you take out an unsecured debt consolidation loan, your assets are not at risk if you fail to make repayments.
This carries a higher risk for the lender. As such, you’ll need a good credit rating to be accepted, and you might expect to pay a higher rate of interest than you would with a secured loan.
What is a secured debt consolidation loan?
A secured loan is a loan secured against an asset, typically your home. With these homeowner loans if you fail to meet your repayments, you could lose your home.
Using your property as security typically increases your likelihood of acceptance and you might get a more attractive rate of interest than you would with an unsecured loan.
Are there alternatives to a secured or unsecured loan?
If you have credit card debt, you may be able to move it to a balance transfer card with a 0% interest introductory offer.
This saves you paying any interest on your outstanding debt for an agreed time. It’s very important to settle your debt before the 0% interest period ends as usually the rate will rise sharply. Some cards will also charge a balance transfer fee, which will add to the overall cost. You will usually need a good credit rating to get one of these types of cards.
What are the benefits of a debt consolidation loan?
If you can keep up with the repayments, you could:
- Potentially lower your monthly repayments by spreading the debt over a longer period
- Possibly reduce the interest you pay. This is especially true if some of your existing debts, such as debts after Christmas, are under high-interest agreements
- Improve your credit rating by making regular repayments
What are the potential dangers of consolidating my debt?
Before you agree to a consolidation loan, make sure it’s the right option for you. Otherwise, you may end up in a worse situation than before.
As with any financial decision, you should consider the worst-case scenario. The possible dangers of debt consolidation could prove disastrous. For many, a debt consolidation loan should be the last course of action.
You should look elsewhere if:
- The loan amount would not cover all your existing debts
- Your current debts are close to settlement
- The fees for taking out the loan are so high that they outweigh the benefit of taking out a new loan
- The fees for paying off your existing loans early are so high they outweigh the benefits of taking out a new loan
- You can't afford to keep up the monthly repayments for the length of the loan
In the end, the final decision is yours. You need to weigh up the benefits against the risks.
How do I get a debt consolidation loan?
There are generally two criteria that lenders will look at before offering you a loan for debt consolidation:
- Your outstanding debt
- Your credit risk
Lenders may only offer secured debt consolidation loans if you have a bad credit history.
Plenty of personal loans can be used for debt consolidation, but some lenders won't allow it, so check before taking out a loan. When you compare loans with us, you can see if it is allowed in the "more details" section of the table. The decision to lend hinges on a combination of factors:
- The amount you want to borrow
- The length of the loan
- Your income and expenditure
Will debt consolidation affect my credit score?
Yes. Your score will typically improve over time if you make successful repayments and lower your outstanding debt. But if you don’t, it will also negatively affect your credit rating. Even paying late can affect your credit rating.
How do I compare debt consolidation loans?
To find a range of consolidation loans compare your options with our comparison service to find the right type of loan for you.