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Debt consolidation loans

What is a debt consolidation loan?

Debt consolidation is a way of reorganising your debts. It involves taking out one loan to pay off several other debts such as overdrafts, payday loans, and credit cards. 

These forms of credit can often charge high rates of interest. 

Much more competitive rates are usually available on bigger loans. This means that combining all your debts into one consolidation loan could reduce the overall rate you pay — and make things simpler too.

To consolidate your debts, you need to work out how much you owe on all your debts in total, and take out a loan for that exact amount. You then use the loan to pay off all your debts, then repay the debt consolidation loan by making monthly payments to just the one lender.

For example, if you have £1,000 outstanding on a credit card, a £2,000 overdraft and £500 owing on a store card, you could take out a debt consolidation loan for £3,500. You use the loan money to pay off the credit card, overdraft and store card, and then make just one payment each month to pay off the £3,500 debt consolidation loan.

The golden rule of consolidating your debts is that, once you have taken out a debt consolidation loan, you should not take on any additional short-term borrowing. Doing so could result in your debts spiralling.

What can you use a debt consolidation loan for?

You can use a debt consolidation loans to consolidate lots of different types of debt. These might include:

  • credit cards

  • store cards

  • personal loans

  • payday loans

  • overdrafts

  • car loans

  • buy now pay later schemes

  • outstanding utility bills

  • payments to debt collectors or bailiffs

How do debt consolidation loans work?

A debt consolidation loan will be either:

  • secured

  • unsecured

Secured loans are loans secured against an asset, usually your home. They enable you to borrow larger sums of money, depending on how much equity you have. However, you risk your home being repossessed if you fall behind on repayments. Secured loans are sometimes called “homeowner loans” and may be your only option if you have a bad credit history.

You should think carefully before transferring unsecured debt, such as credit cards and overdrafts, into a secured loan.

Unsecured loans are loans which are not taken out against anything. The amount you can borrow will be based on your credit rating and income. Unsecured loans are usually for smaller amounts than you might borrow with a secured loan.

Whether you have a secured or unsecured loan, the process for consolidating your debts works the same way.

The lender will pay the lump sum into your bank account — then it’s usually up to you to use the money to pay off each of your debts separately.

Don’t be tempted to spend the debt consolidation money on anything else — the aim is to pay off your debts.

You’ll then need to repay the debt consolidation loan each month for the duration of the term.

How to get the right consolidation loan

Check your credit report

You should check your credit report before making an application for a debt consolidation loan

If you see any incorrect information, you can raise a dispute by selecting the ‘Raise a dispute’ option against the appropriate section of your credit report.

Calculate how much you need to borrow

You need to work out how much you owe in total. Ask your creditors for a settlement amount, including any early repayment fees or other charges, for each of your debts.

Then add up the amounts: this is how much you need to borrow as a debt consolidation loan.

Work out how much you can afford to repay each month

It’s important that your monthly payments on a debt consolidation loan are affordable and fit your budget. Otherwise you may fall into arrears on your debt consolidation loan, or be tempted to borrow money elsewhere.

How much you can afford to pay each month will influence the term over which you take the loan.

Look for a low interest rate

When you take out a debt consolidation loan you’ll pay it back monthly, plus interest. It’s important to find the lowest interest rate you can.

Be aware that you might not get the advertised APR when you apply for a debt consolidation loan. Lenders only have to give their headline rate to 51% of successful applicants. The rate they offer you might be higher or lower depending on your credit score and how much you borrow.

Shop around for the best deals

Make sure you compare loan interest rates and terms from different lenders.

APRs on loans are normally higher for small amounts than larger amounts. The lowest interest rates are usually offered to people borrowing £7,500 or more.  

The longer you have to pay back your debt consolidation loan, the lower your monthly payments will be. But a longer term means you’ll end up paying more interest overall.

Do your homework

Take some time to find the right debt consolidation loan for your situation. Don’t apply without doing your research and considering all the other options as well.

A rejection can make it harder to be accepted for credit in the future. So, when one lender says no, they often all do. TotallyMoney’s eligibility checker lets you know if you’ll be accepted — with no harm to your credit rating.

Whatever type of loan you take out, you need to be sure you can afford the repayments. Missing payments can damage your credit rating. If you have a secured loan you risk losing your home too.

Will a debt consolidation loan impact my credit score?

A debt consolidation loan has the potential to either help or hurt your credit score.

To improve your credit score, you’ll need to make your loan repayments on time.

You should also close your accounts with your previous lenders so this credit is no longer available to you. Having too much available credit could affect future credit applications, as lenders will question why you want to borrow more money.

A debt consolidation loan can damage your credit score if you fail to make repayments on time. Taking out more credit – i.e. the debt consolidation loan itself – can also impact your credit score.

You’ll also need to be disciplined about not slipping back into using the overdraft or credit cards you have just paid off. That’s why you should close your old credit accounts as soon as your debts are paid off.

Is a debt consolidation loan right for me?

A debt consolidation loan could be right for you if you:

  • have multiple debts you’re trying to pay off

  • can borrow enough money to pay off your existing debts including any early repayment charges

  • have a good enough credit score so that you are eligible for a debt consolidation loan with a low interest rate

  • can afford the monthly repayments on the debt consolidation loan

  • have the discipline to stick to the repayment plan and don’t miss any payments

What are my other options?

Balance transfer credit card

If you have credit card debts, a 0% interest balance transfer card is a good alternative to a debt consolidation loan.

A 0% balance transfer card lets you move existing credit card debts to a new credit card charging 0% interest for a set amount of time, typically between three and 24 months.

This means you won’t pay any interest at all on your credit card debt for this amount of time.

Most balance transfer cards charge a balance transfer (BT) fee which is quoted as a percentage of the debt you transfer, with a minimum cash amount. For example, 3% with a minimum of £5. If you transferred £1,000 of debt, a 3% BT fee would mean you pay £30.

You need to take the balance transfer fee into account when working out how much money a balance transfer card will save you.

If you use a balance transfer card to consolidate debts it’s really important that you pay your whole debt before the 0% introductory period ends. The interest rate usually jumps up significantly after this.

You can check your eligibility for credit cards with TotallyMoney to help you find the best card for you. You can see the likelihood of acceptance before you apply.

Money transfer card

There are also credit cards called money transfer cards.

This type of card lets you transfer cash to your current account to pay off overdrafts, loans and other debts. Then you repay the debt at 0% interest for a set period of time. 

Money transfers cards normally charge a money transfer fee. This is usually a percentage of the total amount, and it’ll be added to the outstanding balance on your money transfer credit card.

For example, if you transfer £2,000 and the fee is 4%, £80 will be added to your credit card balance, and you’ll owe £2,080.

You need to take the money transfer fee into account when working out how much cash a money transfer card will save you.


With interest rates at an all-time low, it’s almost certain that you’ll be paying more interest on your debts than you’re earning on any savings.

So if you have cash savings it makes sense to use them to pay off debts wherever possible.

Pros and Cons of debt consolodation loans


  • lower monthly payments

  • only one single monthly payment

  • simplifies your finances

  • you can close down other credit cards and loans

  • can improve your credit rating


  • you might end up paying your debts over a longer time period

  • a longer term could mean you pay more interest overall

  • you need to be aware of early redemption fees on existing financial products

  • you might be tempted to start spending on credit cards and overdrafts again

Check your loan deals

Find the loans you’re most likely to be accepted for. You could even be pre-approved.

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