Debt Consolidation Loans: When They Help and When They Don’t
Rolling several debts into one loan can make repayments simpler and cheaper, but only if the numbers and your habits support it.
What to know
- A debt consolidation loan pays off several debts so you make one monthly payment instead.
- It saves money only if the total cost, including fees and the term, is lower than keeping your current debts.
- A lower monthly payment over a longer term can cost more overall.
- If you’re struggling, free debt advice is available before you borrow more.
A debt consolidation loan is a personal loan used to pay off other debts, such as credit cards, store cards or overdrafts. You’re left with a single payment, a fixed end date and, ideally, a lower total cost.
When consolidation can help
- the new loan’s rate is lower than the debts it replaces
- you’d clear the balance in a similar or shorter time
- one fixed payment makes budgeting easier
- you won’t build up new balances on the accounts you’ve cleared
When it may not
Stretching repayments over a longer term lowers the monthly payment but can increase the total interest. The example below compares paying off a £6,000 credit card balance with two consolidation loans. Figures are rounded and for illustration only.
| Option | APR | Term | Monthly payment | Total repaid |
|---|---|---|---|---|
| Keep paying the card | 24% | 3 years | £228.23 | £8,216.22 |
| Consolidation loan | 9% | 5 years | £123.53 | £7,411.79 |
| Consolidation loan | 12% | 7 years | £103.96 | £8,732.48 |
The 12% loan has a much lower rate than the card but costs more in total, because you pay interest for seven years instead of three.
Handy tip
Check whether your existing debts have early settlement charges, and add any loan fees, before comparing. Our guide to representative APR explains why your personal rate may differ from the advert.
Secured consolidation
Some consolidation loans are secured on your home. That can mean a lower rate, but it turns unsecured debts, like credit cards, into debt your home stands behind. Read secured vs unsecured loans before considering this route.
Watch out
Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
Alternatives to borrowing more
- 0% balance transfer cards: can cut interest on card debt for a set period, usually with a transfer fee.
- Talking to lenders: creditors must treat customers in difficulty fairly and may agree a payment plan.
- Free debt advice: MoneyHelper, StepChange, Citizens Advice and National Debtline give free, confidential help.
- Breathing Space: in England and Wales, a debt adviser can apply for a 60-day pause on most interest, charges and enforcement.
Before you apply
List every debt with its balance, rate, monthly payment and any settlement charge. Compare that with the loan’s total repayable over a realistic term. If the loan is cheaper and the payment fits your budget, it can be a sensible step. If you’re using credit to pay for essentials, speak to a free debt adviser first. Once you’ve taken a loan, you can still repay it early if your situation improves.
Your questions
Does debt consolidation hurt my credit score?
Applying involves a credit search, and a new loan appears on your file. Over time, making payments on time can help, but running up new card balances can make things worse.
Should I close credit cards after consolidating?
Many people close or lower the limits on cards they’ve cleared to avoid building up new balances. Think about how it fits your situation.
What is Breathing Space?
It’s a government scheme in England and Wales, accessed through a debt adviser, that pauses most interest, charges and enforcement action for 60 days while you get advice.
This guide explains how UK borrowing works in general terms and isn’t financial advice. Rates, rules and lender criteria change, so check the details with the lender, GOV.UK or the Financial Conduct Authority before you decide. For advice on your own circumstances, speak to an FCA-authorised mortgage or financial adviser. If you borrow against your home, it may be repossessed if you do not keep up repayments.
