What is debt consolidation?
Debt consolidation can simplify your monthly credit repayments and help you take better control of your finances. But because it means taking on a new debt, it’s important to understand how the process works. Our guide can help you decide whether debt consolidation is the right option for you.
Debt consolidation can simplify your monthly credit repayments and help you take better control of your finances. But because it means taking on a new debt, it’s important to understand how the process works. Our guide can help you decide whether debt consolidation is the right option for you.
60-second summaryLooking for a bite-sized overview of how debt consolidation works? Here are the main need-to-knows:
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What is debt consolidation?
Debt consolidation is when you borrow money to pay off multiple existing debts, typically at a lower interest rate.
Consolidating your debts can reduce the number of monthly repayments you need to keep track of and help you take better control of your finances.
What is a debt consolidation loan?
A debt consolidation loan lets you pay off multiple existing debts – for example, credit cards, a personal loan and an overdraft – by putting them all into one loan with just one monthly payment.
Just to be clear, a debt consolidation loan doesn’t reduce what you owe, but it can help you better manage what you owe. And if you can find a debt consolidation loan with a lower interest rate overall, it could reduce how much interest you’re paying each month on your outstanding debts.
What are the benefits of debt consolidation?
Consolidating your debts could simplify your monthly credit repayments. If you have multiple debt with different providers, all with different interest rates and payment dates, then you might struggle to stay on top of it all.
Paying off what you owe via just one monthly payment can help you stay in control and reduce the risk of missing any crucial repayments.
Ideally, a debt consolidation loan should offer a lower rate of interest than you’re currently paying. That could make your new monthly repayment lower than your existing repayments combined.
Quick tipYou can use our loan calculator to work out how much your debt consolidation loan repayments might be and how much you’ll pay back overall. |
What are the drawbacks of debt consolidation?
A debt consolidation loan might not always be your best option. If you’re struggling to pay your household bills or falling behind on the payments on your existing debts, then a consolidation loan could leave you worse off.
Taking on a new debt, even at a lower rate of interest than your existing ones, could mean you’ll be paying interest for longer. And that means a debt consolidation loan could be more expensive in the long term than your current arrangement.
Is debt consolidation a good idea?
Think about why you’re struggling with debt in the first place. Consolidating debt into a single loan may make it easier to manage, but it won’t clear it.
You’re essentially taking on new debt, even if it’s just one payment each month. If you get behind on your loan repayments, you could find yourself in deeper financial trouble.
A decision to take on new debt should never be taken lightly. For many people, a debt consolidation loan should be the last resort.
Look elsewhere if:
- The loan amount won’t cover all your existing debts
- Your current debts are close to settlement
- You’re still spending on credit
- You’ll build up more debt while repaying the loan
- The fees for taking out the loan mean that it might not be cost-effective
- The fees for paying off your existing loans early (which you would be doing if you paid them off with a debt consolidation loan) 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.
Does debt consolidation affect my credit score?
Applying for a debt consolidation loan involves a hard search on your credit file. A number of hard searches in a short space of time can damage your credit score. But one search shouldn’t have a significant impact, unless you have other credit problems.
Opening a new credit account can cause your credit score to dip temporarily too, as can closing old accounts.
But if consolidating your debts into one loan helps you stay on top of your finances and you make all your repayments on time, then a debt consolidation loan could help improve your credit rating in the long run.
- Find out more: how to build your credit score
Compare debt consolidation loans
You can use our loan eligibility checker to find out which debt consolidation loans you’re most likely to be accepted for. Because it’s a soft credit check, it won’t have any effect on your credit score.
Just give us a few details, including how much you want to borrow and over what period, and we’ll show you suitable loan options.
Try our eligibility checkerFrequently asked questions
What’s the difference between debt consolidation and debt settlement?
The main difference between debt consolidation and debt settlement is that debt consolidation reduces the number of debts you have and, typically, the amount you’re repaying every month. Debt settlement aims to reduce the actual amount of debt you have.
Debt settlement is when you hire a company to negotiate with your creditors to pay off your debts for less than you owe. You typically have to pay one lump sum of a pre-agreed amount.
With a debt settlement, you stop making all repayments on what you owe. And while creditors don’t have to accept a debt settlement offer, if they think it offers the best chance of getting some repayment, then they could be open to it.
Typically, to qualify for debt settlement, you’ll need to show you’re experiencing genuine financial hardship, which is making it difficult for you to meet your repayments.
What are the alternatives to debt consolidation?
If debt consolidation isn’t the right solution for you, alternatives include:
- A 0% balance transfer card
- A money transfer credit card
- Remortgaging
- Debt management advice.
If you’re struggling to pay your household bills and meet other financial commitments, such as your rent or mortgage, you can get free advice on your next steps.
Use Moneyhelper’s debt adviser locator tool to find free, confidential debt advice online, over the phone or near to where you live.
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The Editorial Team - Compare the Market
Experts in personal finance, insurance and utilities
Compare the Market’s Editorial Team is made up of industry experts with decades of experience in personal finance, insurance and utilities. Each of our authors has an area of expertise, where they can share their extensive experience to help you get a better deal, by finding the right product and saving money.