Debt consolidation loans

What you need to know about debt consolidation loans

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Drowning in debt? Find out if a debt consolidation loan could help

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SECURED LOANS: YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE, LOAN OR ANY OTHER DEBT SECURED ON IT.

We compare loans that can be paid back over terms of between one and 25 years. The APR interest rate you’ll be charged depends on your personal circumstances, and will be between 3.2% and 99.9%

This is a representative example of what it may cost: a Loan of £7,500 over 60 months at 3.3% APR would equate to monthly repayments of £135.60, and the total cost of the loan that you pay back would be £8,136.22.

Do I need a debt consolidation loan?

If you owe money to lots of different lenders, a debt consolidation loan is one option you can use to pay off all your debts.

Combining all your debt in this way will mean you only have one monthly repayment to worry about – rather than lots of smaller ones. It may also make it easier to stick to a budget.

Two thirds of people asking about debt consolidation loans are aged between 25 and 44

According to MoneySuperMarket data, correct as of September 2019.

What is debt consolidation?

Debt consolidation is a way of combining your separate existing debts by taking out a single larger loan to pay all the others off.

It does not mean your debts will magically disappear; debt consolidation is simply a way to make your debts easier to manage by transferring them all to one lender.

How does debt consolidation work?

For debt consolidation to work, you need a loan large enough to cover all your existing debts.

When you receive the loan, you use the money to pay off your other debts in full. Then you can concentrate on repaying your one remaining loan – being careful not to take on further borrowing alongside it.

What is an unsecured debt consolidation loan?

An unsecured debt consolidation loan is a personal loan you can use to clear your other debts without putting up a high-value item, such as your home, as collateral.

Personal loan amounts generally range from £1,000 to £25,000. If you want to borrow more than this, a secured loan may be a more suitable option.

What is a secured debt consolidation loan?

A secured debt consolidation loan is a way to borrow money using an asset such as your house as security.

Loans of this kind can be a good option if you want to borrow a large amount or are finding it difficult to get an unsecured loan.  

But beware: the asset may be repossessed by the organisation you borrowed money from if you start missing repayments.

Do debt consolidation loans damage your credit score?

Debt consolidation loan applications will show on your credit report.

Applying for several loans in a short time could therefore have a negative effect on your credit score.

Overall, however, having only one loan to keep track of should reduce the chances of missing a repayment – so the ultimate impact on your credit score could well be positive.

Will debt consolidation save me money?

Debt consolidation can save you money, but there are no guarantees. If you have several different debts, they will probably come with different interest rates.

To be certain of saving money, you need to find a debt consolidation loan that charges less interest overall than you’re currently paying.

If you have several low-interest loans, consolidating your debts could mean paying a higher interest rate, which would not be a good option for you.

The pros of debt consolidation loans

  • Paperwork: If you have lots of debts with different lenders, debt consolidation should make them easier to manage
  • Budgeting: Having one single monthly repayment can help you stick to a budget
  • Savings: If your debt consolidation interest rate is lower, you could reduce the overall amount you have to pay back
  • Credit score: Streamlining your bills should reduce your chances of missing a repayment, which can improve your credit score

The cons of debt consolidation loans

  • Costs: You could end up paying a higher rate of interest on your debt consolidation loan. If it has a longer term, you may also pay more overall
  • Debt: Taking out a consolidation loan that is larger than your existing debt will increase your debt burden
  • Fees: You may have to pay early repayment fees to clear your existing debts

Are there any alternatives to debt consolidation loans?

Alternatives to debt consolidation loans include low-rate credit cards and Individual Voluntary Agreements (IVAs). The best option for you will depend on your individual circumstances.

For free advice on managing your debts, speak to a charity like Stepchange or National Debtline.

Comparing debt consolidation loans

MoneySuperMarket’s loan comparison tool lets you see debt consolidation loans from a range of different providers.

It uses information about your income and requirements to find personal loan quotes for the amount, term and interest rate you’re likely to be able to afford.

If you’re a homeowner, it can also show you secured loan deals.

Remember: the loan rates you see will only include loans you’re likely to be offered and will be based on a simple check that does not show on your credit report.

The loan amount, rate and duration you are offered by a provider may differ because they are based on a more detailed investigation of your credit history and financial situation.

MoneySuperMarket is a credit broker, which means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.

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