Debt consolidation loans

What are debt consolidation loans?

Loans designed to let you pay off your existing debts and replace them with a single, new, loan are known as debt consolidation loans. The idea is that rather than owing money to lots of creditors, often with high interest rates, you are left with just one monthly payment with a single lender.

Debt consolidation loans might also save you money. If the new loan has a lower APR than all or most of your existing loans your monthly repayments should be cheaper. But bear in mind, many debt consolidation loans can be over a much longer period, meaning you could pay more interest overall.

What types of debt consolidation loans can I get?

There are two types of debt consolidation loan; secured and unsecured.

Secured

A secured debt consolidation loan is when the amount you borrow is secured against an asset, typically your home. If you fail to repay the loan, the lender has the right to claim it from the value of the asset. If you secured against your house, you could lose it. The advantage is that the lender has more certainty they will be repaid the money you owe, which usually means a lower interest rate.

Unsecured

An unsecured debt consolidation loan isn't secured against your assets. If you fail to repay an unsecured debt consolidation loan, you're unlikely to lose your home. But you would harm your credit rating and it can result in county court judgements against you and ultimately bankruptcy. You may be charged more interest for an unsecured loan because the lender has less chance of being repaid.

Why you should consider a debt consolidation loan

If you’re struggling to manage several debts, a debt consolidation loan may help you simplify your finances and take control. Other ways debt consolidation loans can help you are by:

Reducing your monthly repayments

Repaying debt with a consolidation loan can cut your monthly repayments. Consolidating debt lets you pay off providers charging high interest. If the new loan has a lower APR, it will reduce what you have to pay each month.

A debt consolidation loan can also be repaid over a longer term than some other debts. Taking longer to repay what you owe could cost you more overall, but the repayments will be in smaller chunks, which may mean they’re more affordable.

Get your finances back on track

Consolidating debt can make repaying what you owe more manageable. You will only have the single debt consolidation loan to repay, instead of juggling many demands for money. You can repay a debt consolidation loan with a fixed payment every month. With breathing space and fixed repayments, you can cut your spending and better plan your finances.

Save on high interest charges

The cheapest debt consolidation loans charge much less interest than some other types of debt, such as payday loans. Repaying high interest charging credit cards, overdrafts or store cards with a consolidation loan could save you money overall. However, if you take the loan over a long time, you could end up paying more in interest in the long term. 

Rebuild your credit rating

Consolidating debt with a debt consolidation loan can be good for your credit history as it shows you have paid what you owed. To benefit, you must also repay the debt consolidation loan on time every month and in full. Improving your credit history with a debt consolidation loan can help give you access to cheaper loan deals in the future.

What are the risks of a debt consolidation loan?

Consolidating debts with debt consolidation loans comes with risks.

If the debt consolidation loan is secured against your home and you miss repayments, you risk losing your house. Miss repayments on an unsecured debt consolidation loan and you will further damage your credit history. Consolidate debt but fail to pay back the debt consolidation loan and you can face bankruptcy.

You may also end up paying more overall with a debt consolidation loan. If you repay your debt in smaller monthly instalments over a longer period of time, the total you pay back may be higher than if you paid back your existing debts more quickly.

You may find that some of your credit providers charge a fee to let you out of your debts early, and you may face extra charges for setting up the new loan. If you’re not offered enough to clear all your debts with one loan, you’ll still have to manage multiple payments.

A debt consolidation may not be right for you if:

Repayments are too big: If you can’t afford the new loan payments even with the cheapest debt consolidation loan you can get, there is no point taking out a debt consolidation loan.

It can’t clear all your debts: If you can’t get a debt consolidation loan that’s large enough to cover all your debts, then consolidating debt may not be right for you.

How much can you borrow using a debt consolidation loan?

Debt consolidations loans will typically offer borrowers between £1,00 and £50,000, or more if you take out a secured loan. The maximum you can borrow will be determined by how much you can afford to repay.

Lenders will look at your credit rating. A good credit rating will mean you can borrow more, and will be offered the best debt consolidation loan rates.

Your income and how much other debt you have will be used to assess whether you can afford the repayments of a debt consolidation loan. Higher income and lower debts mean access to the best debt consolidation loan rates.

How much does a debt consolidation loan cost?

How much you pay for taking out a debt consolidation loan, as with any loan, depends on the APR, or annual percentage rate, you are offered. Compare the APR by using our debt consolidation loan comparison to get the loan that covers your needs.

Included in the APR is the interest rate, and any fees the lender will charge. When you repay the debt consolidation loan, these costs will form part of your monthly repayments.

Debt consolidation loans typically have a higher APR than regular personal loans. So, borrowing using debt consolidation is more expensive than if you can get a high street loan.

Some personal loans charge variable interest rates. Debt consolidation loans with variable interest rates mean that your repayments may go up and down each month. If you are worried about being able to afford higher repayments, or want the certainty of a fixed repayment plan, you should avoid this type of loan.

Applying for a debt consolidation loan

Before applying for a debt consolidation loan, it’s important to consider a few things:

• How much you need to borrow: A debt consolidation loan is most useful if you can cover all your debts. Add up all your remaining debt to figure how much you’ll need to pay off. Make sure you include any fees you may be charged for paying off debts early.

• How long you need to repay: The amount of time you need to repay the loan partly determines what your monthly repayment will be. The longer you take, the lower the repayment will be. However, you will end up paying more in interest over the life of the loan.

• The interest rate: The interest rate you're charged will impact the cost of your loan. While debt consolidation loans typically charge higher interest rates than standard personal loans, it is possible to get a cheap debt consolidation loan if you have a good credit history.

• Take advice: Consider speaking to a debt adviser or charity like StepChange before taking out a consolidation loan. There may be alternatives that are better for your circumstances.

What are the alternatives to debt consolidation loans?

Debt consolidation loans may not always be the best option for your circumstances. This is why it’s a good idea to consider other options for managing your debt. Alternative options can include:

0% money transfer card: These are credit cards that allow you to transfer money into your bank account for a fee and use it to pay off your debts. You can pay off that card interest free until the introductory offer ends

0% balance transfer card: This type of credit card is useful for paying off credit card debt. With this card you can move your debts from different credit cards onto one card and pay it off interest free.