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Debt consolidation loans
What are they and are they a good idea?
Updated 13 June 2024
If you're struggling with multiple debts such as loans, credit cards and overdrafts, it may seem logical to consolidate them into one place – taking out a new loan to pay it all off, so you make one monthly payment instead. However it's often not that simple and can lead to even more debt. This short guide takes you through what to watch out for, alternatives and how to decide if it's right for you.
1-min read on debt consolidation loans
Debt consolidation loans are a way to bring together multiple debts into one place, with a single fixed monthly payment. If done well they can be a useful debt management tool, if not they can land you in far more debt than you started with.
1. Loans have fixed, monthly payments at a set interest rate. Fail to pay off IN FULL each month, and you'll be charged a fine and it'll be marked as a late payment – which will make it more difficult to get cheaper credit in the future.
2. Consolidation loans don't solve debt, it's replacing multiple debts with one big one. It's more borrowing, which can be dangerous. You could end up in more debt than you started with if not managed well.
3. Address the reasons for getting into debt before consolidation. If you struggle to stay on top of your existing debts, it may be equally difficult to manage one large debt. See our debt help page for more guidance.
4. Personal loans are the easiest way to consolidate debt. Only borrow as much as you need to repay your existing debts and repay as quickly as possible. See full info in our guide on How to get a personal loan and, crucially, check your bespoke acceptance odds for a variety of loans, without impacting your credit score, using our eligibility calculator.
What is debt consolidation?
Put simply, it's about bringing all your debts into one place. So rather than having multiple payments to different lenders, potentially on different dates, you just have the one payment to make.
This is usually achieved by taking out a new personal loan to cover the total amount of debt you owe, then using the cash to pay off all your individual debts.
How do debt consolidation loans work?
Consolidation loans are essentially personal loans you use to clear your other debts, allowing you to have one single debt to manage with structured repayments and a single interest rate. So not only do you only have one, fixed repayment to worry about, but you know when it will be cleared.
If you've multiple debts, it's highly likely each amount you owe will be different and at varying interest rates. Equally the repayment amounts and the rate at which it's being cleared will differ – so it can be a job in itself to keep on top of how much you owe, and when you need to pay it.
This is particularly true with overdrafts which don't have structured repayments to clear the balance. It's the same story with credit cards if you opt to just pay the minimum monthly repayment, as your payments mainly service the interest rather than clearing the debt.
Personal loans are different, as payments are fixed and designed to clear the amount you owe by the end of the agreement, usually one to five years.
Who's this guide for? This guide is for anyone considering taking out a personal loan to consolidate existing debts.
Not what you want? Other related guides...
How to get a personal loan | Cut existing loan costs | Balance transfer credit cards | Debt help
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STOP. Address the reasons for getting into debt before touching a consolidation loan
Before considering a consolidation loan, you first need to make sure that you're in a position to pay down the loan, and not run other debts back up.
If you already have multiple debts and generally struggle to stay on top of them, there's a risk that you could face similar difficulties when paying off a consolidation loan.
So for consolidation to work in the long term, there's often more of a 'lifestyle' shift or other compromises you need to make first, or at least alongside it. If you can't commit to this or you're not sure, it may be beneficial to seek debt help instead. Our Debt Problems guide has help to tackle spending, plus details of charities who can give debt advice if needed.
Should I get a debt consolidation loan?
For some, debt consolidation can be a useful tool for managing and organising debt, where it's all in one place, and you know exactly how much you owe, what you pay each month and what the interest rate is.
However, crucially, as it requires more borrowing, it has the potential to lead to even more debt. As we said above, the key to debt consolidation is first tackling the reason you needed to borrow in the first place, and ensuring you're now in a position to avoid borrowing again. Otherwise, you could end up in the same position, with the new, bigger loan on top.
We've unfortunately had many people write to us explaining how debt consolidation loans have left them in a worse position than before – a stark warning to ensure you fully understand what a debt consolidation is before deciding to go ahead with one yourself. Below are some examples.
The last time I consolidated was two years ago when I got a loan for £16,000. I got a nasty shock when I saw that figure written down and promised myself faithfully that I would never run up a single other debt as long as I lived. But I did. Mrs_Sparkle
Been there, done that. Now the loan is one debt among many and costing me the most. Broken_hearted
You'll be paying off one big debt vs lots of smaller debts
A common misconception with debt consolidation is the idea that you're instantly debt-free or that your debt is now manageable and dealt with. Whilst it can be a step in the right direction, it still requires complete dedication to repay the loan on time every month and not be tempted to borrow again. As another MoneySaver explains...
The trouble with consolidation is that you're not debt free. You're debt postponed, and that's very different. However, if you are disciplined and have addressed the reasons for getting into debt in the first place, this may well be the answer for you. iolanthe07
For more examples and to talk to others in the same position (or to ask questions to those that have successfully paid off their debt), head over to the Debt-free wannabe section of our forum. You can also ask a StepChange debt adviser a question on our dedicated forum page.
What are the advantages and disadvantages of a debt consolidation loan?
Advantages
- A single, structured monthly payment. The main benefit of a consolidation loan is that all your debt is in one place, with the same rate of interest. You then have just one payment to worry about each month, with repayments clearing the debt by the end of the term.
- Peace of mind. The mental benefit of having just one loan can have a big impact for some – particularly helpful to become, and stay, organised.
Disadvantages
- You're borrowing more, so could actually add to the amount you owe. You have to be disciplined to make it work, ensuring you can afford both the consolidation loan repayment and your other outgoings without turning to other forms of credit. Fail to do this and you could end up with even more debt.
- A loan may not be the cheapest way to clear your debts. You will have to pay interest on your debt consolidation loan, so it's costing you money. However, there are other ways to repay existing debts – for example, for a small fee, some specialist credit cards can offer 0% interest for a number of months, giving you a respite from paying interest, possibly saving hundreds or even thousands in interest payments. We run through alternatives below.
- It's new borrowing, which will affect you credit score. Applying for additional borrowing when you've already got existing debts could be a red flag for providers and credit reference agencies – as they may see you as high risk. This could have a negative impact on your credit history, which could make it more difficult to get credit again in the future. See our full guide on how to check and improve your credit history.
Alternatives to debt consolidation loans
Before you decide that a debt consolidation loan is the answer for you, first check whether you can cut the costs of your debt in other ways. We take you through these alternatives below.
There's no cheaper borrowing than interest-free, so this is always the first step to try. There are two main routes for this, depending on the type of debts you have (though some with good credit histories may be accepted for both). Importantly, DON'T use them for new spending as it isn't usually at a cheap rate (and because you're trying to pay debts off, not run up new ones).
- Shift debt from existing credit card(s) to 0% with a balance transfer card. This involves getting a specialist new card that repays debts on other credit or store cards for you, so you owe it instead but at 0%.
The exact 0% period varies per card, but top cards can offer up to around two years. You usually have to pay a one-off fee as a percentage of the amount borrowed, yet there are cards that have no fee, so you can sometimes even shift debt for free. Yet even if you do have to pay a fee, it'll likely be far, far cheaper than the interest you'd pay on your existing debt.
See our Top Balance Transfer Cards guide for full info, including our top picks and our eligibility calculator which can show your acceptance odds before applying.
- Overdrafts or high-cost loans – use a 0% money transfer credit card loan to clear it. A few specialist cards offer a 0% money transfer that lets you pay cash into your bank for a small fee. You then owe the card instead but interest-free for a set number of months (typically around 12 months) which is usually much cheaper than paying interest on loans.
Crucially, to get the cheap rate, never just take cash from an ATM. You'll need to ask your card provider for a money transfer. Full step-by-step help is in 0% money transfers.
If one (or both) of these could work for you, it you may be better off keeping some debt separate, unless all of your existing debt is of the same type. Utilising 0% interest deals is by far the best way to slash debt costs, speeding up the time to repay and can save £1,000s in interest.
You'll need to be disciplined for this to work
One disadvantage of credit cards compared to loans is that the payments aren't fixed. It's very easy with cards just to pay the minimum repayment, thinking "I've got another one (or two) years to clear this debt, I'll pay it when I've more spare cash".
Instead, it's best (crucial even) to set up a direct debit to repay a fixed monthly amount that will clear the debt within the 0% period. If you don't think you can stick to this, then even though it's costlier, it's safer to go for a traditional cheap loan.
How do I consolidate debt using a personal loan?
If you've read all the warnings about debt consolidation above, have already tried or dismissed the alternatives, and will be disciplined enough to avoid further borrowing, then a debt consolidation loan could be right for you.
The ultimate aim of debt consolidation is to clear your borrowing in the quickest way possible. Yet taking on more borrowing is never a decision to take lightly. If you're dead set on it, this section tells you how to go about it.
The easiest way to consolidate debt is with a personal loan
For the top-pick lowest rate loans, see our Cheap Personal Loans guide. Make sure you follow our tips below to find if you can get a loan and how best to handle it...
- Work out how much you owe, then borrow only as much as you NEED to and repay it as quickly as you can.
Add up the total debt you have on credit cards, overdrafts, catalogue debts, payday loans etc. Then, if you're paying off one or more loans, call your lender and ask for a settlement figure – as there can sometimes be early repayment charges. Add this to your total. This is the amount you're looking to borrow. No more.
Next, work out how much you can afford to repay each month. Don't forget that once you have a loan, you won't need to make credit card minimum repayments as you'll be clearing the cards in full, so include any cash going to this too. Provided the amount you currently spend servicing your debt is affordable (and won't lead to more borrowing to supplement your income or lifestyle), this could be a good indicator of what you can afford.
Once you know how much you need to borrow, and how much you can repay each month, you'll then be able to work out the loan term (the length of time you want to borrow for). Use our loans calculator to help.
When using the calculator, always look at the total interest cost. A longer loan will give you a lower monthly repayment, but you'll pay more in interest as you're borrowing for longer. Similarly, the longer you borrow for, the less you'll save over your current debt costs.
- Use an eligibility calculator to check your chances of acceptance before applying.
It's next a case of finding a personal loan that you'll be accepted for. Our Cheap Personal Loans guide has full help, things to watch out for and the cheapest rates available.
Usually, applying is the only way to know if you'll be accepted for a loan. Yet that marks your credit file, affecting your ability to get future credit. To help, try our Loans Eligibility Calculator which uses a 'soft search' to find your chances of acceptance before applying. Some lenders will even give guaranteed rates (where a rate isn't guaranteed, you could be accepted but offered a higher interest rate after applying).
If few loans are likely to accept you, revisit the cut debt costs section of our debt help plan guide as there are other options to try, including grants and the credit card shuffle.
- If accepted for a loan, use it to pay off all your debts which have a higher interest rate than the loan.
If your loan application is accepted, the money will be paid into your bank account. Don't make the mistake of spending while your balance is artificially inflated. Use the money immediately to pay off your loans, cards and any overdrafts.
Most providers will let you make payments online or by phone. Whilst paying off a loan closes it, paying off an overdraft or credit card doesn't – so it will remain available for you to use unless you request for the account to be closed. There's no right answer here, but if you think the idea of available credit will be too tempting, then it's best to close it, or cut up the cards (so you can access it, but only in absolute emergencies). See more on cancelling old cards.
- Ensure you make the loan repayments IN FULL and on time each and every month.
Fail to do this and you'll effectively break the agreement, which could lead to penalty charges and missed payments marked on your credit report. If something later goes wrong so you can't repay, contact the lender as soon as you can and ask it for help.
Always, always tell your lender as soon as you know you're not going to be able to repay. It does work. Be firm, make a fair offer of what you can repay and be willing to answer questions about your income and expenditure honestly.
It should then offer you a fair and affordable way to repay, such as a structured repayment plan and the freezing of interest and charges.
As Charlotte emailed, if done correctly and with discipline, a debt consolidation loan can be a useful tool.
In naivety I used to let my husband sort our finances, so would blindly spend. It wasn't until our relationship sadly broke down that I realised how much debt I was in – a £6,000 car loan, £2,300 on a credit card and a £1,500 overdraft I was never out of.
This gave me a sudden wake up call and I set about getting help. I used support from your forum and got my spending under control, cutting out all the luxuries I thought I needed, not taking holidays and halving my food shop.
I looked into a balance transfer for my card debt but chose to take on a loan so I knew I couldn't wriggle out of the payments. I got a lower rate than my existing car loan so cleared that and paid off my overdraft and credit card, which I decided to keep for emergencies.
I managed to get promoted at work and used this extra income to build a small emergency fund and used the rest and my annual bonus to chip away at the loan. It's taken a lot of dedication but just under three years later I've made the final repayment. I can now finally close that chapter and start saving to buy a home.
Avoid debt consolidation companies at all cost
Their job is to make money out of you, plain and simple. While in the short term their plans will make your payments lower, in the long run you'll end up paying far more.
Often companies like these will advertise debt consolidation as a quick fix that will solve debt problems and lift you out of debt instantly, which is not the case. Watch out for firms that charge upfront fees or consultation charges.
As we say above, if you have decided to consolidate your debt with a loan, the best way forward is to use our loans eligibility calculator to check your acceptance odds, without affecting your credit score. See our full guide on how to get a personal loan.
What’s the maximum amount I can borrow with a debt consolidation loan?
How much you can borrow will depend on a few factors, such as your income and credit history. It will then vary by lender, as some might be prepared to lend you more than others.
However, the idea of a debt consolidation loan is to pay off your existing debts rather than to borrow new money, so follow the steps above to calculate how much you need and then see your chances of acceptance for that amount.
If you're not seeing many (or any) lenders for that amount, try a lower figure to see if that improves your results. Though be aware you won't be able to pay off all of your existing debt with it, so you'd need to make a call on whether it would help. For example, is it at a cheaper rate that would allow you to at least clear your most expensive debt?
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