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Debt consolidation loans

Debt consolidation loans. How do they work?

Consolidating debt usually involves taking out new credit in the form of a debt consolidation loan to pay off existing credit. Extra costs can be involved and to understand the risks, it’s important to get impartial advice before going ahead with this.

Most people do this to reduce:

  • the interest rate on their debt
  • their monthly payment amount
  • the number of companies they owe money to

Credit card debt consolidation can also be done by transferring the balance to lower interest cards.

Debt consolidation loans aren't right for everyone. It's important to check all the options available to be sure you're making the right choice. While consolidating debt often sounds like a promising solution, it could make your situation worse. It may not be an option at all if you have a poor credit history.

Debt consolidation can involve extra costs, and potentially makes a difficult situation much worse. That's why it's very important to get free, expert debt help before taking out a consolidation loan.

Debt consolidation and debt management are two different things. It's easy to get confused by the terminology used when trying to sort out your debts.

  • Debt consolidation involves taking out new credit to pay off your debts
  • Debt management is where you, or a debt management plan provider, negotiate affordable payments with the companies you owe money to

Our debt consolidation calculator can quickly help you find out whether you need debt consolidation or debt advice.

There are a range of debt solutions that could be more suitable for your circumstances. Find out more about the differences between debt consolidation and debtmanagement.

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Is it a good idea to consolidate your debt?

Consolidating debts isn’t the best solution for everyone. If you do decide to take out a debt consolidation loan, you’ll only have one company to pay back each month. However, you may be making large payments to that company every month and over a long period of time, which will result in you paying more over the term of the loan . You would need to check if you’re eligible for a loan that’s affordable to you.

If you’re struggling to pay back the debts you have at the moment, you may not be able to afford payments to a debt consolidation loan. Look at your income and spending to see what money you have available and make sure you can comfortably afford the repayments.

Find out more about how to manage your money by budgeting.

cog icon For more information, download our debt consolidation guide (PDF)

What’s an unsecured debt consolidation loan?

Unsecured means the loan isn’t linked to your home. Some consolidation loans require you to secure the loan against your home. However, if you fall behind with payments and can’t afford to repay what you owe, you’re at risk of your home being repossessed.

In some cases it may be an option to use the equity in your home to manage debts or support your retirement plans, but you should always seek expert mortgage and equity release advice if you’re considering this option.

Find out more about secured and unsecured debt consolidation loans and your home.

Do consolidation loans hurt your credit score?

If you keep up to date with all your repayments, your credit score won’t be affected by having a consolidation loan. But if the overall cost of the new loan makes it more difficult to keep up with all your repayments, and you miss any, these missed payments will be recorded in your credit history.

Can I get a consolidation loan with poor credit?

If you have a poor credit history (for example, a record of missed payments and defaults, CCJs, or previous insolvency, such as an IVA or bankruptcy) you’re more likely to be offered consolidation loans with higher interest rates. If this is the case, consolidation loans may not be the best option for you.

Find out more about how debt affects a credit file.

Is consolidating debt worth it?

Debt consolidation is often made to sound like a great solution, but it’s important you understand the reality behind the claims made the adverts – so you understand what it means and what the risks are.

Selling point Reality
"Consolidate all of your debts into one place" Many people who take out debt consolidation loans will end up using credit again. So, they’ll then be repaying debts to more than one company.
"Government debt consolidation" Some companies imply there are government debt consolidation schemes to help with debt. No such schemes exist.
"Lower your monthly payments" If you’re paying less each month, then logically, you must be taking longer to pay off your debts.
"Reduce your interest rates" Even with lower interest rates, debt consolidation loans can often end up with a higher total interest to pay. This is because the loans are taken out with the agreement that they’ll last for a longer period of time.
"Manageable monthly payments" Debt consolidation loan payments aren’t always affordable. The only way to be sure is to run and maintain a proper household budget so you know where your money’s going.

Things to consider before taking out a debt consolidation loan


  • Always pay your existing debts in full
  • Cut up all your credit cards and cancel previous credit agreements in writing, otherwise you might be tempted to borrow more money
  • Get free and impartial debt advice before going ahead with this option - there may be better ways for you to deal with your debts

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