Compare Debt Consolidation Loan

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Debt consolidation loans

What is a debt consolidation loan?

A debt consolidation loan lets you combine multiple debts into one single monthly payment with one lender. This can make it easier to manage your debt and, if your new loan has a lower interest rate, you can save money too.

Debt consolidation loans can be unsecured or secured. Unsecured loans are not secured against an asset such as your home or car, but secured loans are. This means if you are unable to repay a secured loan, your lender can make you sell your asset to get its money back.

What can you use a debt consolidation loan for?

You can use a debt consolidation loan to combine most types of debt, including:

  • Personal loans
  • Credit cards
  • Overdrafts
  • Store cards
  • Payday loans

Is a debt consolidation loan right for me?

Before deciding whether a debt consolidation is right for you, you’ll need to weigh up the pros and cons and assess your own personal situation.

If fees for taking out a new loan or paying off existing ones early outweigh any savings you would make by combining your debts into one, a debt consolidation loan is unlikely to be right for you.

Likewise, you may be better off looking elsewhere if you are concerned you wouldn’t be able to keep up with your new monthly repayments.

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Our Expert Says

If you have several different types of debt, keeping on top of all your monthly repayments can be difficult and expensive.

Debt consolidation loans allow you to combine all those debts into one, which can make juggling your repayments much easier, and potentially save you money too. 

Rachel Wait - Personal Finance Journalist

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What are the advantages of a debt consolidation loan?

  • You may be able to reduce the total amount of interest you pay overall
  • Your monthly repayments may be lower if you spread the debt over a longer term
  • Your debt will be easier to manage as you’ll only have to make one monthly repayment
  • Your credit score should improve if you keep up with your repayments and pay back your loan on time

What are the potential disadvantages?

  • If you miss monthly repayments you could damage your credit score
  • If you are unable to keep up with the repayments on a secured loan you may lose your home
  • If the term of your debt consolidation loan is longer, you could end up paying more overall
  • Any potential savings could be wiped out by fees for setting up your new loan and early settlement of existing debt

Possible Alternatives

If you have credit card debt, a zero-interest balance transfer credit card could be a better alternative to a debt consolidation loan. You simply move over your existing credit card balances to the one card and then benefit from several months of interest-free payments.

There is usually a balance transfer fee of around 2% to 3% to pay and it’s important that you clear your balance before the 0% deal ends and interest is charged.

Alternatively, you could consider a 0% money transfer credit card. With this type of card, you move money from your credit card directly into your bank account. These funds can then be used to pay off existing debts, whether that’s an overdraft, loan or other credit cards.

Again, you’ll benefit from interest-free payments for several months. However, there will be a transfer fee to pay and again, you must clear your balance before the 0% deal ends.

Debt Consolidation Loans FAQ

Can I get a debt consolidation loan with bad credit?

Having bad credit won’t automatically exclude you from a debt consolidation loan, but you may have fewer lenders to choose from. You may also have to pay a higher rate of interest or borrow a smaller sum.

Secured loans tend to be more accessible for those with poor credit ratings but remember you will need to put up an asset such as your home as collateral. If you default on your loan, your home could be repossessed. 

How much should I borrow?

You will need to borrow enough to cover all of the debts you want to repay, plus any fees you might incur for paying them off early. Resist the temptation to borrow any more than this as you’ll only add to your debt and it will cost you more overall.

Will the funds be paid straight to my other lenders?

No. Your loan funds will usually be paid to you and you will then need to pay off each of your existing debts individually.

How long can I borrow for?

If you choose an unsecured debt consolidation loan, you can usually borrow for between one and five years, although some lenders offer loans for as long as seven years.

Secured loan terms are longer and can be up to 25 years or more.

Keep in mind that a longer loan term can reduce your monthly repayments, but you’ll end up paying more in the long run.

Will a debt consolidation loan affect my credit score?

Any method of borrowing will affect your credit score in some way. However, if you make your monthly payments on time and repay your loan within the term, your credit score should improve.  

Where can I get debt help with my debt issues?

If you are struggling under the weight of your debt repayments, speak to your lenders as soon as possible to explain the situation. They may be able to come up with an alternative repayment plan. Alternatively, speak to a debt charity that offers free advice and support and can help you create manageable debt repayment plans. These include Citizens Advice, StepChange and National Debtline.

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