Debt consolidation loans

Consolidating all your debts into one loan might appear to make life easier but there may be better ways to pay off debts. Find out more about how debt consolidation loans work, then get free debt advice before you make a decision.

What is a debt consolidation loan?

If you’ve got lots of different debts and you’re struggling to keep up with repayments, you can merge them together into one loan to lower your monthly payments.

You borrow enough money to pay off all your current debts and owe money to just one lender.

There are two types of debt consolidation loan:

  • unsecured – where the lender has no claim on your other financial assets if you miss repayments
  • secured – where the amount you’ve borrowed is secured against an asset, usually your home. If you miss repayments, you could lose your home

Secured debt consolidation loans

Debt consolidation loans that are secured against your property are sometimes called homeowner loans.

You are more likely to be offered a secured loan if you owe a lot of money or if you have a poor credit history.

You should get free debt advice before you take out a secured debt consolidation loan.

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When should you consider a debt consolidation loan?

Consolidating debts only makes sense if:

  • you end up paying less interest than you were paying before
  • the overall amount you will repay won’t increase
  • you use it as an opportunity to cut your spending and get back on track
  • you can keep up the payments until the loan is repaid
  • you can afford to pay off any fees or charges to your old lenders for switching your loans

Before you choose a debt consolidation loan think about anything that might happen in the future which could stop you keeping up with repayments.

If you can’t stop spending on credit cards, for example because you’re using them to pay household bills, this is a sign of problem debt. You should get free debt advice before taking out a debt consolidation loan.

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Always think about the potential downside of a secured loan.

Your circumstances might change and your home could be at risk if you can’t keep up with repayments


Steve owes £10,000, made up of:

  • £7,500 on a credit card that charges 17.9% interest
  • £2,000 on an overdraft at 18.9% interest, and £20 monthly fee
  • £500 on a pawnbroker debt of £500 charging 68.8% interest

Steve pays a total of £435.83 in interest and fees each month.

If he sticks with his current loans it will cost him £4,145.99 in interest and fees to pay off his debt.

If Steve switched to a debt consolidation loan over the same repayment period, he would only pay 12.6% interest.

It would cost him £3,529.30 in interest and fees to pay off his debt.

Steve would save £616.69 by switching to a debt consolidation loan.

When getting a debt consolidation loan doesn’t make sense

A debt consolidation loan definitely doesn’t make sense if:

  • the interest rate means your monthly repayment will be more than what you’re paying at the moment
  • you can’t afford the new loan payments
  • you don’t clear all your debts with the loan
  • your monthly repayments are lower but your loan will last much longer. This means the total amount you will repay could be more

Debt consolidation loans that don’t put your home at risk

You can shift all your debts to a 0% or low-interest balance transfer card.

This is the cheapest way if you repay within the interest-free or low-interest period. You need a good credit rating to get one of these cards.

You could also consolidate your debts into an unsecured personal loan. You will need a good credit score to get a low interest rate.

Should you transfer your credit card balance?

Your credit score and how it can affect the interest you are charged

Fees and charges for debt consolidation loans

Beware of the high fees some companies charge for arranging the loan.

  • read the small print carefully for any extra fees or charges before you sign anything
  • check whether there are any fees for paying off the loan early as this could cancel out any savings you make
  • avoid paying a fee for a company to arrange the loan on your behalf unless you are getting advice

If you choose a debt consolidation loan

  • Get advice before you make a final decision. There may be better ways to clear your debts that you haven’t thought about.
  • Shop around using comparison websites to find the best deal
  • Don’t just look at the headline interest rate. Compare the APR (the annual percentage rate) as this will include extra costs such as an arrangement fee
  • Cut up your credit cards and cancel any agreed overdraft limits to avoid the temptation to spend again

Get free debt advice now