Credit card debt
Many credit cards charge high APRs making them an expensive way to borrow long-term
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A debt consolidation loan is a type of loan that's used to combine all your existing debts into one pot with one monthly repayment.
It's often an unsecured personal loan, but homeowners can use their property as collateral for a secured loan rate, which is often cheaper.
This won't reduce the amount you owe, but you may pay less interest, making it easier to repay the overall debt.
If you're paying higher interest on some, or all of your debts, rolling them up and paying a lower interest rate can save you money and give you greater control over your finances.
According to MoneySuperMarket data, customers often borrow £10000.00ii to consolidate existing debts.
Remember that taking on new debt is a big decision and a loan might not cover all you owe, so work out your budget and understand that you might end up paying more overall over the loan term, even if month-to-month becomes easier to manage.
A debt consolidation loan can be used to pay off different types of debt, including:
Many credit cards charge high APRs making them an expensive way to borrow long-term
Unsecured loans are often taken out to fund a car purchase, home improvements or a holiday
Most banks charge high interest rates on overdrafts which, over time, can lead to a big debt
While some store cards offer up-front discounts on spending they often have high APRs and fees
Work out what you owe
Calculate the total value of the loan you’ll need to cover outstanding debts and borrow that amount if you can.
Pay off debt with the loan
You’re now able to pay off your existing borrowing with just one loan, which will reduce the number of repayments you have to make each month and lower your monthly interest rate.
Pay back the loan
Pay back the consolidation loan within the set term. Having just one monthly repayment could make things easier to manage.
If you’ve struggled with debt, have CCJs, or have a low credit score you may not be offered the best loan deals.
Some specialist providers may offer secured debt consolidation loans if you have something to use as collateral, like your home.
Remember that with this type of loan, if you don’t keep up with payments, you risk losing your home.
Representative 29.9% APR
Reduce your monthly repayments
This works particularly well if you have quite a few outstanding debts accruing interest
Easier to keep track of your debt
Managing one payment a month is more straightforward than several at once
Boost your credit score
It's easier to make one repayment every month, and doing so can improve your score
Missed payments have consequences
You will damage your credit score if you don't make your repayments in full each month
You may lose your home or car
If you can’t keep up with the repayments on a secured loan your home or vehicle could be repossessed
Other options are available
For example, a 0% balance transfer credit card may suit someone with more modest debts
In August, the Bank of England cut the base rate from 5.25% to 5%. And despite subsequently voting to leave the rate unchanged in September, more reductions are expected soon. This rate influences how much it costs banks to borrow money, and in turn, it affects the interest rates offered on loans to consumers.
When the base rate is reduced, lenders often lower their Annual Percentage Rates (APRs) on loans, making borrowing more affordable. If rates continue to be cut in the coming months then debt consolidation loans may become slightly cheaper, which is especially handy as these typically have higher APRs than normal loans.
However, not all lenders adjust their rates at the same pace. Some may quickly pass on the savings to borrowers, while others may delay or make smaller adjustments. Therefore, it's important to compare loan offers from different lenders to ensure you benefit from the most competitive APRs in the market.
If a personal loan doesn't meet your needs, other forms of lending might relieve some of the pressure, including:
If you're trying to clear a credit card balance, then a balance transfer credit card can help you move your debt onto a card with a lower, or interest-free, period.
If you're trying to clear an overdraft, money transfer credit cards let you pay money directly into your current account and may have a better interest rate.
Second-charge mortgages let you borrow on top of your existing mortgage, but be aware that your home is collateral in this arrangement.
If borrowing more money is not possible, then alternative ways of managing debt include:
When you apply for a loan, the lender will use your credit rating to decide whether to accept you and what rates to offer you.
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Debt consolidation loans are designed to help you manage your existing debt, so the loan will need to cover your existing debts’ value. How much a debt consolidation loan will cost will depend on several factors:
Loan amount | This will depend on the value of the debts you plan to consolidate |
Term | How long you intend to borrow (the average term is 4 years) |
APR | This is the loan interest rate plus any other charges like annual fees or arrangement fees |
Any extra fees | Providers may charge a settlement fee if you pay the loan off early |
You’re not alone. According to our charity partner CALM (Campaign Against Living Miserably), eight out of ten people have experienced money worries in the last 12 months. What’s more, a quarter of a million people worry about money at least once a day.
The good news is that help is at hand. CALM is there to assist you, with practical advice to help you get your debts under control, as well as practical tips on how to talk to people closest to you about your financial situation.
If your finances are affecting your mental health or you really can’t see a way forward, CALM offers a telephone helpline too. It’s open from 5pm-midnight every day, completely confidential and free to call.
Think a debt consolidation loan might be right you? Here’s how to take one out and how repayments work...
Add up the debts you’d like to consolidate. You'll then know how much you’ll need to borrow to pay off your debts
Expect to have to pass a credit check and provide your address history, your expenditure, income and bank details
Assuming you’re approved for your loan, the lender will deposit the loan amount in full in your bank account
With one repayment to make each month and a single debt to service, you should be able to get on top of your finances easier
As long as you make your payments in full and on time, you’ll clear your debt within the allotted timeframe.
Consolidating debt could be the right option if you’re struggling with high interest rates and not clearing what you owe quickly enough. But remember that taking on new debt is a big decision and a loan might not cover all you owe. So it's vital that before you apply, you make sure you’re happy with the terms of the new loan, including how much you’ll be paying each month and for how long.
Not sure if you’ve got the best consolidation loan for your needs? To make sure you have, it’s a good idea to ensure that you...
Keeping the loan amount down means the amount of interest you have to pay will also be lower
Focus on securing a loan with a competitive interest rate to minimise the overall cost of borrowing
Look for manageable monthly payments while not over-extending the length of the loan, so you pay more than necessary
Carefully review any charges, so you're aware what happens if you miss a repayment or want to clear the loan early
We’re here to help find the right loan for you, so we’ll tell you which rates you’re guaranteed to get.
Tell us a little about yourself, your finances and the loan you want
We’ll search through loans from a wide range of lenders on the market
You’ll be able to sort loans by the overall cost and the likelihood you’ll be accepted
Applying for a debt consolidation loan can lower your credit score temporarily. When you apply, the lender will carry out a credit check and this results in a hard inquiry which can hurt your credit rating. Hard inquiries can affect your credit rating for a year. If you make your loan repayments on time and clear your debt this will help to improve your credit score.
Most banks offer secured or unsecured loans which can be used for debt consolidation.
Weigh up which loan is the right option for you, and use our comparison service to find other FCA-regulated lenders that meet your needs.
Yes, you can consolidate debt with a credit card. You can do this with a balance transfer card which moves your debt onto to a lower interest rate card.
Whether or not a debt consolidation loan is right for you will depend on your circumstances and financial habits. If you keep up with payments, it can help make your debt more manageable. If you miss repayments, you run a serious risk of drowning in more debt.
A debt consolidation loan can be unsecured or secured. Your credit score can play a part in the type of loan you’re offered. If you have bad credit, you’re more likely to be offered a secured debt consolidation loan.
