Debt consolidation loans

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What is a debt consolidation loan?

A debt consolidation loan lets you turn multiple debt payments – credit cards, store cards, overdrafts or loans – into one convenient payment. This type of loan could be an especially good option if you can find one with a lower interest rate, as it could reduce the total interest you’re paying on any outstanding debts.

Debt consolidation loans come in two forms: secured and unsecured. Before offering you a loan for debt consolidation, lenders will look at your outstanding debt and your credit risk. They may only offer secured debt consolidation loans if you have a bad credit history.

At a glance

Pay off multiple debts in one monthly payment

Find a lower interest rate to reduce the total interest paid on outstanding debts

Regular, manageable repayments could help to improve your credit rating

One single loan can be easier to manage than several debts owed to different lenders

 Taking on new debt is a big decision: extending the length of your loan means you may pay more interest – so the loan could cost more in the long run

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What can you use debt consolidation loans for?

You can use debt consolidation loans for lots of different types of debt, including:

  • credit cards
  • personal loans
  • store cards
  • overdrafts
  • payday loans
  • medical bills

How do debt consolidation loans work?

Taking out a debt consolidation loan means you can pay off debts with multiple lenders, then focus solely on repaying your single debt consolidation loan.
 
Here’s an example of how a debt consolidation loan could look over a 3-year period:

  • Amount borrowed (over 3 years): £6,000
  • Representative APR rate: 6.1%
  • Annual interest rate: 6.1%
  • Monthly instalments: £182.36
  • Total charge for credit: £564.86
  • Total to repay: £6,564.86

What are the advantages and disadvantages of debt consolidation loans

Advantages

  • Potentially lower your monthly repayments by spreading the debt over a longer period.
  • Possibly reduce the interest you pay – especially if some of your existing debts are under high-interest agreements.
  • Improve your credit rating by making regular, manageable repayments.

Disadvantages

  • Missing payments on a debt consolidation loan will negatively affect your credit rating.
  • Any potential savings might be cancelled out by additional fees and charges that are required to set up the loan or settle existing loans, so you could end up paying more.
  • You may lose your home or car if you can’t keep up with the repayments on a secured loan.

Can I get a debt consolidation loan if I have bad credit?

Yes, it’s possible to get a debt consolidation loan if you have bad credit or a poor credit history.

Lenders will want to check your credit rating, but you won’t be automatically discounted because of a bad credit history. And it could be said that having just one monthly payment can be easier to manage than owing several amounts to different lenders.

If you own your home, you might be able to get a secured debt consolidation loan at a better interest rate. Just be aware that if you default on repayments, you risk losing your home.

Although it’s not impossible to get an unsecured debt consolidation loan if you have bad credit, your choices might be limited. Interest rates will probably be higher and the amount you can borrow may be lower.

Is debt consolidation right for you?

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. For many, a debt consolidation loan should be the last course of action. 

You should 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 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.

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. Find a list of free debt advice services on the Money Advice Service website.

Frequently asked questions

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

A secured loan is a loan that puts an asset, such as your home or car, up as collateral against the money you’ve borrowed. If you fail to meet your repayments, your home or car could be repossessed.
 
With an unsecured debt consolidation loan, your assets are not at risk if you fail to make repayments.
 
Using your property as security typically increases your likelihood of acceptance and you might get a lower rate of interest than you would with an unsecured loan – but it’s riskier.

Can I just use a personal loan to consolidate my debt?

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 debt consolidation 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.

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.

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

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

A guarantor is usually a trusted person, such as a family member or close friend with a good credit history. They must be willing to pay off your debt consolidation loan if you’re not able to.

How do I get a debt consolidation loan?

  • Before making a decision, contact a debt advisor to help – they may be able to suggest other available options.
  • If a debt consolidation loan makes financial sense, use Compare the Market to find deals from leading lenders.
  • Make sure you check the APR for unsecured and the APRC for secured loans – not just the headline interest rate. These will include fees and charges to show the total cost.
  • Organise a budget and avoid spending on credit or store cards, as this may cause your debt to spiral.

How do I compare debt consolidation loans?

Compare your consolidation loan options with our comparison service to find the right type of loan for you.

How much do I need to borrow?

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

Do I have to pay off all my debts with the 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 – so it’s easier to budget and understand interest and other charges. However, if you have a particularly good interest rate on one of your loans, you may be better off not switching.

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.

How much does a debt consolidation loan cost?

Interest rates vary according to the size and duration of the loan.
 
Longer durations may attract lower rates, but repayments will be made for longer.
 
Borrowers with poor credit records will be charged higher rates of interest.

What details do I need to get a debt consolidation loan quote?

Applications are made on the lender’s site. You’ll need to have details to hand, such as:

  • all the addresses you’ve lived at for the past three years
  • your email address
  • your employer’s details, including their address and phone number
  • details of your monthly income and outgoings
  • your bank or building society account details.

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**On average, it can take less than 2 minutes to complete a loan comparison through Compare the Market based on data in November 2020.

Anelda Knoesen

From the Money team

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.”

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