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What is a debt consolidation loan?

If you have existing debt with a number of different lenders, a personal loan for debt consolidation can help you by lowering your monthly repayments and saving you money on interest payments.

By borrowing enough to then pay off your current debts, you’ll owe money to just one lender, helping to simplify your monthly repayments by merging existing debts from all your creditors.

A loan designed to merge what you owe from different providers can be used for credit card debt consolidation, to pay off unsecured and secured personal loans, arranged overdrafts and store cards.

How do debt consolidation loans work?

Loans to pay off debt allow you to put all of your existing debt into one single loan, so instead of making many smaller individual payments to different lenders each month, you make just one repayment to one lender once a month.

A debt consolidation loan won’t reduce the total amount you owe, but it can make it easier to manage your finances and help you budget because you’ll only have one debt repayment to keep on top of each month.

A consolidation loan may also save you money in the long run, by switching from higher interest products such as credit and store cards to a lower interest rate loan.

It’s essential to work out if you will save money by consolidating your debt by looking at the interest rate, APR and total repayable of your existing debts and comparing them to consolidation loan rates using an online calculator.

You will also need to check the terms and conditions of your other financial products to see if you need to pay an early exit fee on any existing loans you may have.

Are there different types of debt consolidation loans?

Yes - there are two types of debt consolidation loans - secured and unsecured.

Unsecured consolidation loans typically allow you to borrow between £1,000 to £25,000. Unsecured loans tend to be offered to people with a reasonable or good credit score.

A secured debt consolidation loan is money you borrow secured against an asset that the lender will use to reduce the risk of lending to you. The asset is usually your home, which you risk losing if you cannot repay what you’ve borrowed.

You can usually access lower interest rates when you apply for a secured debt consolidation loan compared to an unsecured loan. You can also generally borrow higher amounts when you secure a loan against your home. However, if you do not repay what you owe, you may be at risk of having your home repossessed.

How to get a debt consolidation loan?

Once you’ve researched and compared debt consolidation loans, you can either choose to apply online directly with a lender, at a bank’s branch or with us.

You’ll need to fill in an application form which will include the following questions;

Full name
Contact details
Date of birth
Address
Relationship status
Employment details
Employer details
Income
Your financial commitments
Any outstanding debt you have with other lenders
Living expenses

This information helps lenders to understand your financial circumstances so they can decide whether or not to lend you money.

The lender will assess your creditworthiness and typically look at your credit report to determine if you’re eligible.

Most lenders will use an automated process to work out if they can approve your application, so you can sometimes get an answer immediately or within hours if you apply for an unsecured loan. Secured loans may take longer to be approved.

Can I get a debt consolidation loan?

This will depend on your personal circumstances. Many lenders allow you to check if you’re eligible for a loan before you apply by performing a soft credit check on your credit report. Soft credit checks are visible only to you, and won’t affect your credit score.

If you use an eligibility checker on a comparison site and find you don’t match any of the lender’s criteria, you can attempt to improve your credit score over the next six months to be in with a chance of being approved.

You can help to improve your credit score by doing the following;

Registering to vote
Checking your credit report for any mistakes
Keeping your borrowing utilisation low
Avoiding withdrawing cash on credit cards
Never missing or being late paying bills
Having a mortgage
Avoid multiple applications for credit within a short period
Checking to see if you're financially associated with somebody you're no longer linked to

Are debt consolidation loans bad for your credit?

Debt loans will affect your credit score in different ways, depending on your behaviour.

Being a responsible borrower can improve your score. So by simplifying the way you manage your finances and making payments on time and in full, consolidating your debt could improve your credit score.

If you cannot pay back what you’ve borrowed and miss payments, your credit score could be negatively affected, which may make it harder to secure credit in the future, and any secured assets you might have used for the loan may be at risk of being repossessed.

What are the alternatives to a debt consolidation loan?

0% Balance transfer credit cards

If you have debt on credit cards that you’re paying interest on, a 0% balance transfer credit card could help you pay off your outstanding credit card debt quicker.

Transferring your existing balances to a card with a 0% interest rate for a set period could help you reduce the interest you’re paying, saving you money.

You’ll need to pay a minimum repayment each month, and if you miss a payment, you’re likely to be charged a fee. You may also lose your 0% interest rate deal.

Any outstanding balance on the credit card after the 0% deal has expired could be subject to high interest rates, which can be higher than a personal loan.

It's also worth noting that you need a good credit score to be approved for a 0% balance transfer credit card.

Negotiating directly with your lenders

If you’re struggling to keep up with your debt repayments, the first thing you should do is speak to your lender directly. You may be able to negotiate reduced monthly payments with your creditors. You’ll need to demonstrate why you’re unable to afford your current payments.

If you start paying less than the full payment you originally agreed on, this will be recorded on your credit report, which can make it more challenging to be approved for credit products in the future.

Speaking to debt charities

There are many charitable and not-for-profit organisations that can provide you with debt consolidation help.

These include;

What are the best debt consolidation loans?

Many different lenders offer loans to clear debt, including banks, credit unions and digital lenders.

The best debt consolidation loans will depend on your circumstances. What’s suitable for one person might not be right for you and vice versa.

It’s important to weigh up your options when choosing a loan by looking at whether or not you could afford the monthly repayments, the rates of interest, APR and any fees that may be payable.

What are the pros and cons of debt consolidation loans?

Reduce your monthly payments
Can lower the amount of interest you're paying on your debts
Easier to keep track of your repayments

You may need to pay early exit fees to your existing lenders
If youu miss a repayment, your credit score will be damaged
If you can't keep up your repayments when you take out a secured debt consolidation loan, you may lose your home

Debt consolidation loans FAQs

Is getting a loan to consolidate debt a good idea?

Whether a debt consolidation loan is the right option for you will depend on your financial circumstances. It’s important you research the alternatives before making a decision, and if you can afford to, speak to an independent financial adviser.

If you’re unable to afford to speak to an adviser, you can talk to a debt charity for free, who will be able to chat to you about your debt consolidation options.

Consolidating your debts can make it easier to stay on top of your multiple repayments and may reduce your monthly payments. You may also save money by decreasing the interest you’re paying on your current debt.

It’s essential to compare the overall interest you’ll pay on a debt consolidation loan before making any final decisions.

A secured debt consolidation loan should be considered a last resort because your home could be taken away if you cannot repay.

Secured lenders may promise one easy low monthly repayment stretched over many years, meaning you pay more interest, so you must do the maths to see if consolidating your debt will save you money in the long run.

Can I get a debt consolidation loan with bad credit?

Even if you have a bad credit score, you may still be able to get a consolidation loan for poor credit.

A secured debt consolidation loan is usually easier to be approved for than an unsecured one. This is because the lender will use an asset, such as your home, as collateral to reduce the risk of lending to you.

Your home is at risk if you do not keep up the repayments of a secured debt consolidation loan.

If you have a bad credit history, you may still be approved for a debt consolidation loan for poor credit. Often you’ll be offered a loan with higher interest rates than advertised because you appear riskier to the lender than people with a good credit history.

How long are debt consolidation loans?

The time it takes to pay back a debt consolidation loan will depend on how much existing debt you already have. Typically, lenders allow you to borrow money between 12 months to five years or longer at fixed interest rates.

Why can't I get a debt consolidation loan?

The most common reasons for people not being approved for a debt consolidation loan include bad credit history, not meeting the lender’s eligibility criteria or not passing affordability checks.

To be in with the best chance of being approved for a loan, use an eligibility calculator, which will tell you which lenders are most likely to lend to you.

If the results show that no lender is likely to lend to you, you may want to wait and work on improving your credit score. Alternatively, if you have concerns around your financial well-being, contact moneyhelper.org.uk for free and impartial advice.

There are debt consolidation loans for bad credit on the market, although they tend to charge more interest than standard loans and if it’s a secured loan, you risk losing your home.

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