Debt consolidation loans

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Combine your debt into one payment: is it worth it?
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What is a debt consolidation loan?

A debt consolidation loan, or debt loan, lets you pay off debts from multiple lenders by combining them into one single loan from a single provider.

For the avoidance of doubt, the amount you owe doesn’t go down. Instead, you turn multiple debts into one debt.

For example, say you owe £4,000 on credit cards, £2,000 on a loan and £500 on your overdraft, all with varying interest rates. You could apply for a £6,500 consolidation loan, use that to clear your existing debts, then make one single payment towards your new loan each month until your debt is repaid.

But if the new loan is set to be paid back over a longer period than your previous debts, you’ll be paying interest for longer. That means, even if your interest rate is lower, you might end up paying more interest in total – so make sure you do the maths.

Types of debt consolidation loan

Debt consolidation loans come in two forms:

Secured debt consolidation loans

With a secured debt consolidation loan, you secure the loan against an asset such as your home. You can typically get a lower interest rate with a secured loan than a personal loan, but you risk losing your home if you don’t keep up with your repayments.

Unsecured debt consolidation loans

If you qualify for an unsecured debt consolidation loan, you won’t have to put up an asset as collateral. Lenders look at your financial status and credit history to decide if you’re eligible for an unsecured loan.

How do debt consolidation loans work?

Here’s the process if you decide you want to take out a debt consolidation loan:

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. Don’t forget to include any early repayment charges or fees that may apply when you repay loan debt early.

2. Apply for a debt loan

If you compare loans with us and decide on one that’s right for you, you’ll be taken through to the lender’s website to apply. You’ll then typically need to give the following information:

All the addresses you’ve lived at in 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 it approves your application, it will pay the agreed loan amount into your chosen bank account.

3. Pay off your existing debts

Use the debt loan to pay off your existing creditors. You’ll then have just one repayment to make each month on your new debt consolidation loan.

4. Pay off your new loan over time

Finish paying off the debt consolidation loan within the set timeframe. It’s a good idea to set up a monthly direct debit so you don’t miss any payments.

What can I use a debt consolidation loan for?

Debt consolidation loans can be used for different types of debt, including:

Credit cards
Personal loans
Store cards
Overdrafts
Payday loans.

What are the advantages and disadvantages of debt consolidation loans?

The pros of debt consolidation loans

Easier to manage your debt – one payment, made once a month, is easier to track than several.
Could improve your credit score – as long as you make regular repayments.
Lower interest rate – hopefully, you’ll pay less interest per month than you did on your old debts. But bear in mind that if you spread the repayments over a longer period, you might still pay more interest in the long run.

The cons of debt consolidation loans

You’re taking on new debt – which will involve a hard credit check that leaves a mark on your credit file.
You may pay more in total – extending the length of your loan means you’ll be paying interest for longer. That means your debt consolidation loan could cost you more overall.
Upfront costs – potential savings might be outweighed by any fees involved in setting up the loan and settling existing loans.
You may not qualify for the rates you see advertised – it depends on the eligibility criteria of the lender as well as your credit history and financial status.
You could lose your home (on a secured loan) if you miss payments – that’s a pretty big risk, so only take out a secured loan if you’re totally confident you can repay it on time.

How much do debt consolidation loans cost?

We’ve not included loan rates here, as they’ll be dependent on the loan you choose, your credit history and market conditions.

But put simply, if rates for a debt consolidation loan are lower than what you pay now, then it may be worthwhile. Don’t forget that if you choose a longer term than you have now, even at a lower rate, then you may pay more interest overall.

And as with any loan, you’re likely to get a penalty and a hit to your credit score if you miss a payment.

What are the alternatives to a debt consolidation loan?

If you don’t feel a debt consolidation loan is right for you, there are some alternatives to consider:

0% balance transfer card

A 0% balance transfer card lets you move debt from one or more credit cards to a new card with a different provider. You’ll often have to pay a fee to transfer the debt over, but you’ll benefit from a lower or 0% interest rate for a fixed time.

Make sure you pay the debt off before the 0% period ends to avoid moving onto high, standard rates.

Money transfer card

With a money transfer credit card, you can transfer money from a credit card into your bank account. You can then use the cash to pay off your debt.

There’s often a money transfer fee, typically 3% to 5%, but some cards offer 0% interest on the outstanding balance for a set period.

Bear in mind that there aren’t many money transfer cards on the market these days. If you do get accepted for one, you should ideally pay off what you owe in full before the end of the interest-free period. Once that’s over, you’ll be charged interest on what you owe.

Remortgaging

If you have enough equity in your home, remortgaging could let you free up some cash to pay off your existing debts.

While headline interest rates on a mortgage can be lower, you may need to extend your mortgage term. This can cost you a lot of money in the long run.

If you default on your mortgage repayments, you risk losing your home. It’s best to get advice from a mortgage broker before making this decision.

Debt management advice

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 among your creditors.
Individual Voluntary Arrangement (IVA) – an agreement to make regular payments to an insolvency practitioner, who then divides the money between your creditors.

Don’t take these decisions lightly. MoneyHelper has information on debt management and where you can get free debt advice.

Are there debt consolidation loans for bad credit?

Debt consolidation loans for bad credit are available, but your choices may be more limited if you have a poor credit history. 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 such as your home or car.

A secured loan might also offer a lower interest rate. But be aware that if you take on debt for longer, you could pay more overall. And if you default on the repayments, you risk losing the asset you secured the loan against.

How much does a debt consolidation loan cost?

The total cost of your loan will depend on:

The amount you’re borrowing
The APR (annual percentage rate), which is 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
Market conditions at the time.

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. That means the loan could cost you more overall
Borrowers with poor credit records are typically 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.

Try our loan calculator

What do I need to compare loans?

Comparing our best debt consolidation loan deals is simple. Just give us a few details about:

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

Our loans comparison can then show you suitable loan options. 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.

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.”

- The Editorial Team, Experts in personal finance, insurance and utilities

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Frequently asked questions

Who offers debt consolidation loans?

Some lenders offer loans specifically for debt consolidation. Other providers allow you to take out a personal loan for debt consolidation.

When you use our loan eligibility checker, we’ll ask you what you want to use the loan for. Select debt consolidation from the drop-down menu. We can then show you loans you’re likely to be accepted for, from lenders that allow debt consolidation.

Can you get a fixed rate consolidation loan?

Fixed debt consolidation loan interest rates 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 get a personal loan for debt consolidation?

While there are personal loans that 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.

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

If you have a good credit history, you probably 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 may offer added security for the lender 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.

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.