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Debt consolidation lets you combine multiple debts, such as credit cards, personal loans or overdrafts, into one repayment plan. The goal is to make your borrowing easier to manage and, in some cases, reduce the interest you pay.
Here, we break down what debt consolidation is, how the process works, the pros and cons, and what to be aware of before consolidating your debt.
What is debt consolidation?
Debt consolidation is the process of combining multiple debts into a single new credit agreement, typically with a single monthly repayment. Instead of keeping track of multiple credit cards, personal loans, store cards or overdrafts, you consolidate debts into one place to make your finances easier to manage.
For many people, the goal of debt consolidation is to simplify repayments, benefit from a lower interest rate or create a clearer plan for paying off what they owe. In some situations, especially if your existing borrowing has a high interest rate, consolidating could help you lower the total cost of your debt.
People often consider consolidation when they want a more structured way to repay borrowing, or when differing rates and due dates make it difficult to keep track.
What is a debt consolidation loan?
A debt consolidation loan is a type of personal loan specifically used to pay off existing borrowing. Once approved, you use the loan funds to clear your current debts, leaving you with just one monthly repayment instead of several. These loans can be secured or unsecured, depending on factors like your credit history, the loan amount and whether you have an asset to use as security.
They're commonly used by borrowers managing multiple repayments, such as several credit cards, a personal loan and an overdraft, and want a simpler, more predictable way to pay everything off.
Here’s how it works in practice: If you currently have three separate debts (such as a credit card, a home improvement loan and an overdraft) with different repayment dates and interest rates, you could take out one loan to clear them. You’d then have a single monthly payment to one lender.
It’s worth noting that debt consolidation with a low credit score is still possible, but loan options may be more limited and interest rates can be higher. In these cases, comparing lenders and checking eligibility before applying could help you find the most suitable option.
How do debt consolidation loans work?
A debt consolidation loan replaces several existing debts with one new loan, giving you a single monthly repayment to manage.
Here's how the process typically works:
1. Add up your existing debts: Include credit cards, personal loans, overdrafts and any other balances you want to consolidate.
2. Compare interest rates and terms: Look at how the new loan's rate and repayment period compare with what you're currently paying.
3. Apply for a consolidation loan: If approved, the funds are used to pay off your existing debts directly, or you'll receive the money to clear them yourself.
4. Make one monthly repayment: From then on, you'll focus on a single lender, a single repayment date and one interest rate.
If you want to see how consolidation could affect your monthly payments, check out our debt consolidation calculator.
Sometimes, taking out a debt consolidation loan to manage your finances can mean you end up paying higher interest, or it could take longer to pay the money back.
What debts can be consolidated?
Many borrowing products can be consolidated into a single monthly payment, such as:
- Credit cards: Consolidating credit card debt is a common option, especially when paying high interest rates.
- Store cards: Similar to credit cards, usually with higher rates.
- Personal loans: You can bring multiple unsecured loans together into one.
- Overdrafts: Consolidation can help turn an ongoing, variable balance into a fixed-term repayment plan.
Not all debts are eligible. Secured debts, such as mortgages or loans tied to a property or vehicle, usually can’t be consolidated with standard unsecured loans. Student loans and certain specialist finance agreements are generally not included. It’s essential to review the lender’s requirements for complete details.
If you're consolidating unsecured debts, you’ll usually move them into an unsecured personal loan. If you're consolidating secured debts, the new loan would also need to be secured, which carries a higher level of risk, as your asset is used as collateral.
Learn more about secured vs unsecured loans.
Pros and cons of debt consolidation
A debt consolidation loan could be a useful option for organising your finances, but it’s important to weigh up both the benefits and the drawbacks before deciding if it’s right for you.
Advantages
- One simple monthly repayment
- Bringing several debts together could make budgeting simpler and reduce the chance of missing a due date
- Potential to lower your interest rate
- If your new loan has a lower rate than your existing debts, you could reduce the amount you pay overall
- A fixed-term loan could give you a set end date for clearing your debt, which you might find easier to plan around
- Making consistent, on-time payments on a single loan could help strengthen your credit score over time
Disadvantages
- You could end up repaying the debt over a longer period
- Lower monthly payments can be attractive, but they often mean paying interest for a longer period
- You could pay more in total
- A lower rate doesn't always mean lower overall cost if the loan term is extended
- The lowest interest rates depend on your financial circumstances and credit history
- Missed payments still carry consequences
- Falling behind on the new loan can negatively impact your credit score and may result in additional fees
Can you consolidate debts if you have a low credit score?
It can be more challenging to consolidate debts if you have a low credit score, but it’s not impossible. Some lenders offer options such as secured debt consolidation loans that may be available even with a lower credit score.
Before applying, consider taking steps to improve your credit score. Checking your credit report, correcting any errors, reducing existing borrowing where possible, and keeping up with current repayments can all make a difference. Planning carefully and understanding what you can realistically afford to repay will increase your chances of approval and help you manage the loan successfully.
Things to consider before taking out a debt consolidation loan
Before you apply for a debt consolidation loan, it’s important to make sure it’s the right solution for your financial situation. Here are the key factors to keep in mind:
- Total cost of borrowing: Look beyond the monthly repayment and consider the total interest and fees over the life of the loan. A lower monthly payment may still result in paying more overall if the term is extended.
- Length of repayment: Longer repayment terms can make monthly payments more manageable, but may increase the total interest you pay. Choose a term that balances affordability with cost.
- Impact on your credit score: Applying for a loan and taking on additional borrowing can affect your credit profile. Consistently making timely repayments can help improve your credit score over time.
- Seek financial advice: Before you make a financial decision to consolidate your debt, you may want to speak to a financial advisor for support.
- Consider alternatives: Debt consolidation is just one way to manage multiple debts. Depending on your situation, other options, such as a balance transfer, debt management plan or exploring support options directly with lenders, might be more suitable.
Ask yourself before applying:
- Can I comfortably afford the monthly repayment?
- Will this loan actually reduce my overall interest costs?
- Am I planning to avoid taking on additional debt while repaying this loan?
- Have I compared other debt management options to make sure consolidation is the best choice for me?
Carefully considering these points could help ensure that debt consolidation is a suitable option for your circumstances and doesn’t create additional financial strain.
How to apply for a debt consolidation loan
Applying for a debt consolidation loan doesn’t have to be complicated. Following these steps could help you make informed decisions and manage your repayments effectively:
1. Check your credit score
Before applying, review your credit report to understand your credit score. This helps you anticipate the interest rates and terms you may be offered.
2. Compare rates and repayment terms
Different lenders offer different interest rates, fees and repayment terms. Take time to compare options to find a loan that suits your budget and goals.
3. Use an eligibility checker or debt consolidation calculator
Tools like an eligibility checker or calculator can help you estimate monthly repayments and see if a loan is a realistic option for your situation.
4. Apply online
When you’re ready, complete your application through a secure online platform. You’ll provide information about your income, current debts and personal details so the lender can assess your affordability. To get a better idea of your options without affecting your credit score, consider requesting quotes that don’t impact your credit score, allowing you to see potential rates and repayments clearly before committing.
5. Manage your repayments efficiently
Once approved, make timely monthly repayments. Staying on top of your instalments helps reduce interest costs and protects your credit rating.
How could The AA help?
We offer personal loans that could be used for debt consolidation, designed to help you manage multiple debts more easily.
You can apply for an unsecured personal loan with The AA and NatWest Boxed if you:
- Are aged 18 or over
- Are a UK resident with a UK address
- Haven't been declared bankrupt in the last 6 years
- Haven't applied for a loan with The AA or NatWest in the last 28 days
Find out more about our debt consolidation loans. Transparent rates, flexible repayment terms and the ability to get a quote without affecting your credit score could make it easier to see what works for you before committing.
Taking out a debt consolidation loan is a significant step, and it may not cover all your existing debts. If some balances remain elsewhere, you’ll still need to manage multiple repayments. Be aware that repaying certain loans early could incur fees, and spreading repayments over a longer term might increase the total interest you pay, making the loan more expensive overall.
Before making any financial decisions, such as applying for a debt consolidation loan, you may wish to seek independent advice first.
Need help managing your debt?
If you have financial worries, consider consulting a debt expert for advice. Many organisations offer free, confidential support to help you create a plan to get your finances back on track.
We’ve listed some trusted organisations below:
FAQs
Is debt consolidation a good idea?
Debt consolidation can be a useful way to manage multiple debts by combining them into a single repayment. It may simplify your finances, help reduce your monthly payments or allow you to secure a lower interest rate.
However, it isn’t suitable for everyone. If the total cost of the new loan is higher or if you continue to take on additional debt, consolidation could actually impact your financial circumstances. A debt consolidation loan doesn’t erase your debt. It just moves it. Consider your budget, repayment ability and alternatives before applying.
Does debt consolidation affect your credit score?
Applying for a debt consolidation loan can temporarily impact your credit score, as lenders will usually perform a hard credit check. Once approved, making regular on-time repayments can help improve your credit score over time. Missing payments, however, could negatively affect your credit rating, so it’s important to ensure you can manage the repayments comfortably.
How long does it take to consolidate debts?
The time it takes to consolidate debts varies depending on the lender and the type of loan. In many cases, if your application is approved quickly, you can use the funds to pay off existing debts within a few days. Some applications may take longer if more documentation is required or if the loan is secured against an asset.
What is the difference between consolidation and refinancing?
Debt consolidation involves combining multiple debts into a single loan, which can simplify repayments and reduce interest costs, depending on the lender and your financial circumstances. Refinancing, on the other hand, usually replaces an existing loan with a new one that may have a different interest rate or term, without necessarily combining multiple debts. While both options can help manage borrowing, consolidation specifically focuses on consolidating multiple debts into a single repayment.