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Debt consolidation loans

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What is debt consolidation?

Debt consolidation is the process of combining several existing debts into one payment plan to simplify your bills and lower your monthly repayments.

If, for example, you have a couple of credit cards, a personal loan and an overdraft, each with a different interest rate and payment date, it can be difficult to keep track of all your outgoings.

If you consolidate debt, it can save you time and stress, although it’s not without risk.

What is a debt consolidation loan?

A debt consolidation loan, or debt loan, lets you pay off debts from multiple lenders by repaying one single loan. This type of loan can be beneficial if you can find one with a lower interest rate, as it could reduce the total interest you’re paying on your outstanding debts.

Debt consolidation loans come in two forms: secured and unsecured. Before offering you a loan to consolidate debt, lenders will look at your outstanding debt and your credit history.

What can I use a debt consolidation loan for?

Debt consolidation loans can be used for many different types of debt. These include:

  • Credit cards
  • Personal loans
  • Store cards
  • Overdrafts
  • Payday loans
  • Medical bills.

How to consolidate debt

Whether it’s debt consolidation for credit cards or other loans, here’s how you can combine your debts:

  1. Work out what you owe
    Add up the total cost of your existing debts and work out how much you’d need to borrow to pay them all off.
  2. Apply for a debt loan
    You can apply via the lender’s website or app. You’ll need to have these details to hand:
    • All the addresses you’ve lived at for the past three years
    • Your email address
    • Details of your monthly income and outgoings
    • Your bank or building society account details.
      The lender will run a credit check to decide whether to offer you the loan. If they approve your application, they’ll pay the agreed loan amount into your bank account.

  3. Pay off your debts
    Use the debt loan to pay off your existing creditors. You’ll then be left with just one repayment to make each month and one rate of interest to cover the debt consolidation loan.
  4. Pay off your loan
    Finish paying off the debt consolidation loan within the set timeframe. It’s a good idea to set up a monthly direct debit to make sure payments are made on time.

What are the advantages and disadvantages of debt consolidation loans?

Advantages Disadvantages
Lower monthly repayments – spreading the debt over a longer period at a fixed rate means your monthly repayments are potentially more affordable.

You’re taking on new debt – extending the length of your loan means you’ll be paying interest for longer, and it could end up costing you more overall.

Lower APR – debt consolidation loans can have a lower interest rate than other types of credit. Upfront costs – potential savings might be outweighed by additional fees involved in setting up the loan and settling existing loans.
Easier to manage your debt – one payment, made once a month, is easier to track than several. Risk of losing your home – if you can’t keep up with repayments on a secured debt consolidation loan, the asset you put up for security could be repossessed.
Could improve your credit score – as long as you make regular repayments. Missed payment penalties – if you don’t pay back your loan on time, this could damage your credit rating.

What are the alternatives to a debt consolidation loan?

If you want debt consolidation for credit cards, a 0% balance transfer card means you can move what you owe to a single card and benefit from not paying any interest for a while.

However, if you don’t think you can repay your debt in full before the 0% introductory rate ends, then this option might not be right for you.

If you’re struggling to pay off your debts, speak to a debt advisor. They can help you find a way to take control of your finances and pay back what you owe in affordable monthly instalments. Options include:

  • Debt management plans – an agreement between you and your creditors to pay all of your debts in affordable monthly payments.
  • Administration Order – if your debts are under £5,000 and you have a county court judgment (CCJ), you can apply to make one payment a month to your local court. The court will then divide this money between your creditors.
  • Individual Voluntary Arrangement (IVA) – an agreement to make regular payments to an insolvency practitioner, who will then divide the money between your creditors.

MoneyHelper has information on debt management and where you can get free debt advice.

Is debt consolidation right for me?

A decision to take on new debt should never be taken lightly. Before you agree to consolidate loans, make sure a debt consolidation loan is the right option for you. Otherwise, you may end up in a worse situation. For many people, a debt consolidation loan should be the last course of action.

Look elsewhere if:

  • The loan amount won’t cover all your existing debts
  • Your current debts are close to settlement
  • The fees for taking out the loan are so high that it might not be cost-effective 
  • 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.

Are there debt consolidation loans for bad credit?

Debt consolidation loans are available for people with a bad credit score or a poor credit history. But choices may be limited. Interest rates on the loan will probably be higher and the amount you can borrow may be lower.

Your credit score will likely be a deciding factor in how much lenders are willing to let you borrow. They might be prepared to lend you more if you secure the loan against a valuable asset like your home or car.

A secured loan might also get you a better interest rate. But be aware that if you default on repayments, you risk losing the asset you secured the loan against, such as your car or home.

 

How much does a debt consolidation loan cost?

The total cost of your loan consolidation will depend on:

  • The amount you’re borrowing
  • The APR (annual percentage rate) – the total cost of your borrowing for a year
  • The length of your loan (typically two to five years)
  • Potential fees – for example, an early repayment fee if you pay off the loan early.

You’ll also need to consider that:

  • Interest rates vary according to the size and length of the loan
  • A longer loan may attract a lower rate of interest, but repayments will be made for longer
  • Borrowers with poor credit records will be charged higher rates of interest.

Our loan calculator can give you an idea of how much you could borrow and what your monthly repayments would be.

What do I need to compare loans?

Use our loan eligibility checker to find out which loans you’re likely to be accepted for. This is a soft credit check and won’t impact your credit score.

Just give us a few details about:

  • How much you want to borrow and what for
  • Over what period of time
  • Your financial circumstances and residential status.

We’ll show you a table of suitable loan options listed in order of lowest APR first. You can check the features of each loan, including which ones allow for debt consolidation.

Try our eligibility checker

 

Compare The Market Limited acts as a credit broker, not a lender. To apply, you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility. 

Author image Alex Hasty

What our expert says...

“Although potentially a last resort, debt consolidation loans can help you manage your debt more efficiently. Make sure you read the small print carefully and check to see if you’ll be charged a fee for paying off your other loans early – as this will affect the savings you’ll make with a debt consolidation loan.”

- Alex Hasty, Insurance and finance expert

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Frequently asked questions

Can you get a fixed rate consolidation loan?

Fixed rate debt consolidation loans are available. This means you’ll know exactly what you’ll pay each month. The fixed rate available to you will depend on your credit score and history, as well as the amount you’re asking to borrow.

Can I use a personal loan to consolidate my debt?

While plenty of personal loans can be used for debt consolidation, some lenders won’t allow it, so check before taking out a loan. When you compare loans with us, you can see if debt consolidation is allowed in the ‘more details’ section of the table.

What is the difference between secured and unsecured debt consolidation loans?

With a secured debt consolidation loan, you’ll need to use an asset, like your home or car, as security for the money you’ve borrowed. If you fail to meet your repayments, your home or car could be repossessed.

Unsecured debt consolidation loans don’t need assets as security. This means your lender can't seize your home or car if you fail to make the repayments. However, they can take action against you if you're unable to repay your debts and so your assets may still be at risk if you end up in a court or bankruptcy process.

Will I need a guarantor to get a debt consolidation loan?

If you have a good credit history, you won’t need a guarantor to get a debt consolidation loan. However, if you have a bad credit rating or no credit history, a guarantor will offer added security and could increase your chances of getting a loan.

How much should I borrow with a debt consolidation loan?

With a debt consolidation loan, you should borrow just enough money to pay off your debts. Borrowing more than you need will add to the cost of repayments and increase your debt.

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

You don’t have to pay off all your debts with a debt consolidation loan, but the main benefit is that you only owe money to one lender instead of several.

However, if you have a particularly good interest rate on one of your loans, you may be better off not consolidating that one.

Is the debt consolidation loan paid to my other lenders?

The money you borrow will usually be paid straight into your bank account so you can arrange to clear each of your debts separately.

Do debt consolidation loans hurt your credit rating?

Taking out any form of credit will initially have a negative impact on your score. However, your credit rating will improve if you make the repayments on time.

What should I do if I’m struggling with debt?

If you’re having difficulties, first talk to your lenders – they may be able to help. You can also get free, expert debt advice from trusted services such as MoneyHelper, Citizens Advice and National Debtline.

The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.

Page last reviewed on 24 JANUARY 2024
by Alex Hasty