Before considering a consolidation loan
If you are struggling to repay existing debts or missing essential bills, a debt consolidation loan is not always the right answer. Free debt help may be more suitable.
Free, impartial charities can help you understand all your options — including debt management plans, breathing space, and other alternatives that do not involve taking on more credit:
- StepChange — 0800 138 1111 — stepchange.org
- National Debtline — 0808 808 4000 — nationaldebtline.org
- MoneyHelper — 0800 138 7777 — moneyhelper.org.uk
What is a debt consolidation loan?
A debt consolidation loan is used to combine some or all of your different debts into a single monthly payment. The loan is typically paid directly to your other lenders, leaving you to repay one lender instead of several.
Under the right circumstances, this can make budgeting simpler. But it is not always the right solution and can make your overall debt worse in some cases.
The rate you are offered will depend on your credit history, income, existing debts, loan amount, term and the lender’s own checks. Do not compare loans by monthly payment alone — always compare the total amount repayable across the full term.
A lower monthly payment does not always mean a cheaper loan. A longer repayment term can reduce your monthly cost but increase the total amount you repay overall.
Types of consolidation loan
Secured consolidation loans are secured against an asset — typically your home. If you cannot repay, your home may be at risk of repossession. These are sometimes offered to people with larger debts or lower credit ratings.
Think very carefully before using a secured loan to consolidate unsecured debts. Credit card and personal loan debts are unsecured — there is no property risk attached to them. Converting those debts into a secured loan changes that. If you cannot keep up repayments and the loan is secured against your home, your home may be at risk.
Unsecured consolidation loans are not secured against property or assets. They are usually offered for smaller amounts or where the borrower has a reasonable credit history. A personal loan is the most common form.
Possible benefits
Debt consolidation may help some people by:
- Reducing the number of separate payments to manage
- Making budgeting simpler with a single payment date
- Potentially reducing interest costs — but only if the new total amount repayable is lower than the combined cost of your existing debts
Important risks
Debt consolidation can also make things worse if:
- The repayment term is extended and the total amount repaid increases
- Unsecured debts are moved into a secured loan, putting your home at risk
- You continue using credit after consolidating
- The new monthly repayment is still unaffordable
- Arrangement fees, early repayment charges, or broker fees reduce or eliminate any saving
What affects eligibility
Eligibility varies by lender. Lenders typically assess:
- Income and regular outgoings
- Credit history, including existing debts and missed or late payments
- The total amount you wish to borrow
- Whether you can afford the repayments if your circumstances change
- Whether the loan is secured, and what equity you hold in your property
What to compare
Before making any decision:
- Add up the total amount owed across all debts you plan to consolidate, including any early repayment charges on existing credit
- Calculate the total amount repayable on any consolidation loan — not just the monthly figure
- Compare the total cost over the full term, not just the monthly payment
- Check whether the new loan is secured or unsecured, and what that means for your home or assets
- Check that the new monthly payment is affordable even if your income falls or your expenses rise
- Lenders are only required to offer the advertised representative APR to 51% of applicants — the rate you are offered may differ
Alternatives to consider
If you are struggling with debt, a consolidation loan is not always the right option. Free debt advice charities can help you understand all available alternatives — including debt management plans, individual voluntary arrangements, breathing space, and others that do not involve taking on new credit:
- StepChange — 0800 138 1111 — stepchange.org
- National Debtline — 0808 808 4000 — nationaldebtline.org
- MoneyHelper — 0800 138 7777 — moneyhelper.org.uk
- Citizens Advice — citizensadvice.org.uk
Related guides: Personal Loans · Bad Credit Loans · Guarantor Loans · Secured Loans