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What is Debt Consolidation?

Consolidating personal debt is about converting existing expensive debts into a single lower-rate loan that is more affordable and saves you money overall. You can do this whether you have a good or bad credit rating.

If you’ve got outstanding personal debts including unsecured loans, credit cards, overdrafts and store cards then you might want to consider a loan to merge them into a single monthly payment.

These so-called “debt consolidation loans” could be a single larger unsecured loan or a secured loan if the debts are much greater and you own your home.

People use the phrase “debt consolidation” as if it is some sort of magic pill. In fact you need to be very careful when looking to consolidate your debt especially if you are combining unsecured debts with different repayment terms.

Debts to consolidate

These are examples of unsecured debts you can consolidate:

  • Credit cards
  • Store cards
  • Bank overdrafts
  • Personal Loans
  • Lines of credit
  • Medical, Utility & Phone bills

Generally, you cannot consolidate mortgages or loans secured against assets.

Consolidation Loans

How Debt Consolidation helps

Debt consolidation aims to help with debt in two ways. By:

  • Reducing the monthly debt repayment to an affordable amount
  • Simplifying the structure of the debt to make it easier to control

The example below shows how this is done. The person has a range of existing unsecured debts. Each has a different rate of interest, monthly repayment date and repayment term. Meanwhile, their income arrives on a particular day in the month. They are beginning to struggle to manage their payments, for two reasons:

  • managing their monthly budget from day to day is difficult given the timings of their income and various payments
  • the total of all their payments on top of their routine spending is beginning to outstrip their income.

They are becoming uncertain about which payments they can afford to make and when. Debt is dragging them down.

Consolidation will:

  • Bring together your various debts into a single loan
  • Make just one affordable monthly loan repayment
  • Reduce your total interest cost

How debt consolidation works

The person decides to consolidate their debts. They want to reduce their monthly payment, and they want to simplify their repayment. Their chosen debt consolidation loan provides a single payment that’s also lower than they were paying before so making the debt repayment more affordable.

Remember! Debt consolidation doesn’t reduce the overall amount that you owe. It only aims to cut your interest costs and simplify the management of your debt. After you have consolidated your debt do not add new debt – stop using your credit card, don’t drift into your overdraft facility, etc.

When restructuring your debt like this you want to not only reduce your monthly payment, but also the total amount of interest you will have repaid by the end. Be careful about extending the repayment period as this will either reduce the savings you can make or worse could increase your total interest costs.

How to Consolidate your Debts

Before you apply for a debt consolidation loan you need to be clear what debt you are going to consolidate and what your it is currently costing you. It’s also worth getting hold of your credit file and implementing any quick fixes available to you. Then start the process of comparing consolidation loan options and ensuring they make financial sense.

Compare Debt Consolidation Loans

The size of the debt you want to consolidate will help determine the right type of loan to use. Everyone can use an unsecured personal loan and if you own your home and have a mortgage then you have the option of a secured loan. A secured loan will allow you to consolidate larger debts at a lower rate than with an unsecured loan, but your property is at risk.

If you don’t own your home but do own your car then you could look at the option of a logbook loan – a loan secured on your vehicle.

Consolidation with a Secured Loan

Using the illustration above here is how a new secured loan could consolidate existing unsecured debts to help reduce a person’s debt repayments:


Before Consolidation

Assume an existing unsecured debts of £10,000 comprising:

  • £7,500 on a credit card – interest rate 17.9% APR
  • £2,000 on a bank overdraft – interest rate 18.9% APR plus a £20 monthly fee
  • £500 short-term loan – interest rate 68.8% APR.

Total monthly repayments on this debt are £435. The total interest repaid by the end of the repayment term is £4,145.


After Consolidation (secured loan)

The person takes out a secured loan for £10,000 at a rate of 12.5% APR (much lower rates are currently available). This loan is used to pay off the more expensive debt above.

The total monthly payment is reduced to £335 compared to £435 before.

The person also halves the total amount of interest they need to repay, assuming a reasonable 3-year repayment period.


Warning: A secured loan means it is secured against the home that you own. If you use a secured loan to consolidate your unsecured debts your home may be repossessed if you fail to keep up loan repayments. Also, it is possible that while reducing the monthly payment you may end up paying more overall if you extend your loan too far.


Alternatively, these unsecured debts could be consolidated using a new personal loan. This would avoid any property risk, but the interest rate would most likely be higher. Secured loans are only available to homeowners with a mortgage.

Debt Consolidation – part of a Debt Solution

You may think that if you have historic credit problems you’ll never be able to get back in control of your finances. If you are saddled with various debts as well you may feel very vulnerable. We like to think that a loan to consolidate your debt is part of an overall plan to get control of your finances and family budget. It will not solve issues on its own, but if done properly it could help you as long as you take other steps.


There is little point in going through the process of debt consolidation unless you stop racking up new debt. So, you also need to cut your expenditure.


Here are some ideas of what you could do:

  • Set a proper budget for you and your family – to do this properly take a little time to examine where your monthly income goes. Make sure this budget is less than your income.
  • Ensure you know precisely what your debts are – you may need to prioritise them.
  • Can you pay off any of your debt by selling unwanted goods (on eBay for instance)? It’s amazing what “stuff” people have collected and much of it may still have some value

Once you’ve got to a position where your debt is no longer growing, because of overzealous spending, and you’ve managed to pay off some debt (?) then look to reduce the cost of your existing debt through consolidation.


At any time you have access to free debt advice and we would encourage you to use it.



Guide to Managing Debt

If you’re uncertain which type of credit might suit you or you have a money problem then one of guides may help you. We summarise each type of loan and their pros and cons, and address issues regarding debt and credit ratings.

Got a Question about Debt Consolidation?

Answers to Common Questions

What is debt consolidation?

Debt consolidation is a way to merge some or all of your personal debts into a new, single, lower-cost monthly payment. It also makes the management of your debt easier.


What is “Consolidation”?

The dictionary definition of “consolidation” is:

“to combine (a number of things) into a single more effective or coherent whole”

In the case of loans this means:

  • pulling together a number of loans into one larger loan (i.e. “single”)
  • reducing the overall cost of servicing and paying off the debt (i.e. “effective”)
  • reducing the overall stress on the borrower and making both financial and human sense (i.e. “coherent”)
What debts can I consolidate?

You can consolidate unsecured debts such as credit cards, store cards, overdrafts, personal loans (inc. payday loans, instalment loans), lines of credit and even some types of bill (e.g. utility and phone). You cannot consolidate loans that are secured on an asset, such as a mortgage.

How do debt consolidation loans work?

Over time you may accumulate a variety of unsecured debts such as credit cards, short term loans, etc. As this happens it may become progressively more difficult to manage the debts and perhaps even afford the repayments. The process of consolidation is about paying this existing debt off with a new one where the aim is not only to simplify the administration but also reduce the overall costs.

How do I get a debt consolidation loan?

The process for getting a debt consolidation is described here, but in essence, it requires you to know in detail what debt you have and what it is costing you. You have to choose which type of loan suits your circumstances and meets your affordability objectives.

Do debt consolidation loans work?

Debt consolidation loans do work if you plan them properly. If you have then you can achieve lower repayments without pushing the repayment term too far into the future. You must ensure you meet the repayment terms of the new loan which is all the more important if you have opted to use a secured loan.

When is debt consolidation a good idea?

Although you can choose to consolidate your debt at any time it is really only a good idea if:

  • you reduce your monthly payments (to make your debt more affordable each month) and the total interest you pay by the end is less than would otherwise have been the case
  • these savings aren’t swallowed up by any fees or charges you might incur as you consolidate
  • you simultaneously cut your spending and don’t grow your debt further.

If you can’t reduce your spending and you racking up new debt then you have problems that debt consolidation cannot solve. In this case, you should get free debt advice. See our blog for other articles about debt.

Are debt consolidation loans a bad idea?

Debt consolidation is a bad idea if:

  • your new loan payments are unaffordable
  • the new loan isn’t large enough to clear your other more expensive debt
  • you choose to extend the repayment period of the new loan and end up paying more interest overall
  • your debt problem is more fundamental and you need proper debt advice
  • you use a secured loan to do debt consolidation and you put your home at risk knowing the payments are going to be a challenge.
Where can I get a debt consolidation loan?

There isn’t a specific loan called a “debt consolidation loan” but there are various types of loan that can be used to consolidate more expensive debt into one that is cheaper overall. These are either secured or unsecured loans. We’ve listed the main options here.

Will debt consolidation damage my credit rating?

Debt consolidation is about improving your ability to repay your debts so if you choose your loan wisely you should be able to enhance your credit rating in the long run. Using a new, lower-cost loan to pay off more expensive debt is actually sound financial planning – just don’t expose yourself to additional risks, especially if you elect to use a secured loan as your way to debt consolidation.

Can I get a debt consolidation loan if I have a bad credit rating?

If you have had credit problems and your rating is not perfect you should still be able to find a new loan to consolidate your existing debt. This includes secured loans if you are a homeowner. Do keep in mind that the rate will be higher than for someone with good credit, and you will need to make sure that your new loan will indeed save you money overall. If you believe your debt situation is more fundamental then we would urge you to get free debt advice before committing to debt consolidation. You may find a debt advisor can suggest other ways to alleviate the problem you have.



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Written/Reviewed by: Amanda Gillam

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