Consolidating all the money you owe into one loan might appear to make life easier, but there might be better ways of dealing with your debts. Find out more about how debt consolidation loans work, then get free debt advice before you decide.
What’s in this guide
What is a debt consolidation loan?
If you’ve got lots of different credit commitments and you’re struggling to keep up with repayments, you can merge them together into one loan to lower your monthly payments.
You borrow enough money to pay off all your current credit commitments and owe money to just one lender.
There are two types of debt consolidation loan:
- Secured – where the amount you’ve borrowed is secured against an asset, usually your home. If you miss repayments, you could lose your home.
- Unsecured – where the loan isn’t secured against your home or other assets.
Debt consolidation loans that are secured against your home are sometimes called homeowner loans.
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You might be offered a secured loan if you owe a lot of money or if you have a poor credit history.
It’s important to get free debt advice before you consider taking out a secured debt consolidation loan. This is because they won’t be right for everyone and you could just be storing up trouble or putting off the inevitable.
When should you consider a debt consolidation loan?
Warning
Always think about the potential downside of a secured loan. Your circumstances might change and your home could be at risk if you can’t keep up with repayments.
Consolidating debts only makes sense if:
- any savings aren’t wiped out by fees and charges
- you can afford to keep up payments until the loan is repaid
- you use it as an opportunity to cut your spending and get back on track
- you end up paying less interest than you were paying before and the total amount payable is less (it could be more if you repay over a longer period).
Before you choose a debt consolidation loan, think about anything that might happen in the future which could stop you keeping up with repayments. For example, what if interest rates go up, or you fall ill or lose your job?
If you’re regularly using credit to pay for basic household bills, this would be a sign that you’re in financial distress. A consolidation loan might not solve your problems.
It’s important to get free debt advice before taking out a debt consolidation loan.
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When getting a debt consolidation loan doesn’t make sense
A debt consolidation loan definitely doesn’t make sense if:
- you can’t afford the new loan payments
- you don’t clear all your other credit commitments or debts with the loan
- you end up paying more overall (due to the monthly repayment being higher or the term of the agreement being longer), or
- you need help sorting out your debts rather than a new loan – a debt adviser might be able to negotiate with your creditors and arrange a repayment plan.
Debt consolidation loans that don’t put your home at risk
A better option might be a 0% or low-interest balance transfer card. But you'll need to consider if a fee will be applied to the balance transferred.
This can be the cheapest way provided you repay the money within the interest-free or low-interest period.
Keep in mind that you’re likely to need a good credit rating to get one of these cards and might have to pay a balance transfer fee.
You might also consolidate your debts into an unsecured personal loan, but again, you’ll need a good credit rating to get the best deals.
Find out more in our guides:
Should you transfer your credit card balance?
How your credit rating affects the cost of borrowing
Is your household income getting squeezed?
If you’re facing higher living costs, but have little or no extra money coming in, find out about extra sources of income and support available to help you manage your household bills and save money in our guide Living on a squeezed income
Fees and charges for debt consolidation loans
Beware of the high fees some companies charge for arranging the loan.
It’s important to:
- read the small print carefully for any extra fees or charges before you sign anything
- check whether there are any fees for paying off existing loans early, as this could cancel out any savings you make
- avoid paying a fee for a company to arrange the loan on your behalf unless you’re getting advice (and you’re sure it’s worth the cost).
If you choose a debt consolidation loan
- Shop around using comparison websites to find the best deal.
- Get advice before you make a final decision. If you want to proceed with a consolidation loan, consider talking with a free, independent financial adviser who might be able to find the most suitable product for your needs.
- Don’t just look at the headline interest rate. Compare the annual percentage rate (APR), or the annual percentage rate of charge (APRC) for secured loans. The APR is the interest you’ll be charged, and the APRC will include the extra costs such as an arrangement fee.
Watch out
Some comparison sites earn money from sponsored listings, where companies pay to have their products appear at the top of the search results.
