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Debt consolidation loans
Are too many payments keeping you down each month? Consolidate your debts into one loan to save on interest and get out of debt faster.
What is debt consolidation?
Debt consolidation is the process of combining multiple debts into one manageable monthly payment – ideally with lower interest charges. Debts could include credit cards, overdrafts or car finance payments.
The best way to consolidate debt depends on factors like the amount and kinds of debt you have, your income, your equity and your credit history.
When you consolidate debt, your goals might be to:
- Pay a manageable amount each month
- Reduce the number of payments you’re having to make (and in turn the admin and possibility of letting one debt slip)
- Reduce the overall cost of borrowing
The perfect debt consolidation solution will achieve all three of these aims. However, realistically, debt consolidation can sometimes mean achieving two out of three of these aims: fewer and smaller monthly repayments, but a greater overall cost. As a general rule, you should aim for a solution with the lowest overall cost while keeping the monthly outgoings affordable.
Crunching the numbers can be made a little bit more fiddly since your existing credit arrangements might involve costs for exiting early.
It’s worth noting that “debt consolidation” is usually a reason for taking out a loan, rather than a class of loan in itself. However, some lenders might market their loans as “debt consolidation loans”. In a few very specialist cases, the funds from a debt consolidation loan might be issued directly to your creditors rather than to you.
What debts can I consolidate?
Pretty much any. As well as any informal borrowing (from friends or family), specific financial products you could look to consolidate include: –
- Overdrafts
- Payday, doorstep or other short-term loans
- Logbook loans
- Car finance including hire purchase and personal contract plans
- Credit cards, store cards or charge cards
- Personal loans
- Loans secured against belongings, property, land or other assets
However, before you consolidate debt, you should take a moment to work out which debts would be cheaper when consolidated, and which would be cheaper if left alone. For example, a payment plan to a utility provider is likely to have very favourable terms that are hard to beat, while a credit card might charge an extortionate rate that’s easier to improve on.
What is the smartest way to consolidate debt?
There are different financial products you could use to consolidate your debt. These include: –
- A balance transfer or money transfer credit card
- An unsecured personal loan
- A guarantor loan
- A secured “homeowner” loan
- Remortgaging
Each has advantages and disadvantages, and your specific situation will determine which of these products is best suited to you. Let’s take a closer look at each.
A credit card
How does it work?
Credit cards aren’t just about making new purchases – they can be used for clearing debt too. Money transfer credit cards allow you to transfer money from the card to your current account. They typically charge 0% interest for a promotional introductory period which could last as long as a couple of years. However, each transfer will usually involve a fee of 2-3% of the transfer amount.
Balance transfer credit cards are perhaps better known. These are about moving debt from one or more expensive card(s) to a single new, cheaper card. Again, the cards typically come with 0% interest for a specified number of months from account opening, but each transfer will usually involve a fee of 2-3%.
Is it suitable for me?
A credit card might be a suitable way for you to consolidate debt if…
- You have a high enough credit score to get offered a limit that will cover your outstanding debts. Opening limits typically start at £3,000-£10,000 (but can be lower if you have a poor or limited credit history and higher if you have a high income and an excellent credit rating).
…But it’s important to be aware that…
- Credit cards present a way to get yourself into even more debt, because they’re a “revolving line of credit” – i.e. you can dip into them to borrow more at any time (subject to credit limits).
If you can get approved for a card with a long enough 0% deal, a high enough credit limit and flexible enough terms, then a credit card could actually be a very smart choice. Use an “eligibility checker” to find out your likelihood of being approved for a card before you apply (these involve a “soft” credit check, which means they won’t affect your credit score). However, you’ll need to have the self-discipline to set your own repayment schedule and stick to it, and not use the card for additional spending. Most credit cards offer the facility to set up a direct debit for an amount of your choosing – this could be the safest way to hit your target of getting debt-free and also to protect your credit record from any missed payments.
Use Finder’s eligibility checker to find suitable cards you’re likely to get approved for
An unsecured personal loan
How does it work?
With a traditional unsecured loan (available from high street banks and online lenders alike) you borrow an agreed sum for an agreed amount of time, get a fixed rate of interest and pay back a fixed amount every month until the end of the loan term. Lenders set interest rates based on their assessment of your circumstances – the advertised “representative APR” only has to be given to 51% of applicants. The good news is that, other than the interest, most (but not all) unsecured loans involve no fees.
Is it suitable for me?
An unsecured personal loan might be a suitable way for you to consolidate debt if…
- You have a high enough credit score to get offered a large enough loan to cover your outstanding debts, at a rate that makes for affordable monthly repayments. Unsecured personal loans are commonly available for amounts between £1,000 and £25,000 over loan terms of 1-7 years, but each application for credit will be assessed on its own merit.
…But it’s important to be aware that…
- Unsecured personal loans are fairly rigid financial products. A few might offer a repayment holiday option, most will let you make overpayments, but by and large everything’s “fixed”. That can be a good thing if you’re looking for a simple and structured plan to work your way out of debt by a specific point in time.
To get an idea of the best rates available to you and the sort of sums you could borrow, it’s smart to use an online loan matching service which runs a soft search of your credit file (a search that can’t affect your credit score) and quickly “pings” multiple lenders to find out which of them can offer you a loan, and what interest rate they’d offer. This process takes less than five minutes.
Use Finder’s eligibility checker to find loans you’re likely to get approved for
A secured “homeowner” loan
How does it work?
If you’re a homeowner with a mortgage, you could opt to take out a secured loan, also known as a homeowner loan or second charge mortgage. By offering lenders more security, a secured loan could allow you to borrow larger sums, and/or to benefit from better rates. It’s not a decision to be taken lightly, since it involves securing the debt against your property.
Is it suitable for me?
A secured loan might be a suitable way for you to consolidate debt if…
- You own a property with a mortgage and have built up enough equity to get offered a large enough loan to cover your outstanding debts. Secured loans are commonly available for amounts between £10,000 and £500,000 over loan terms of up to 30 years. They can be a popular option if you don’t want to disrupt your “first charge” mortgage, perhaps because of a very competitive fixed-rate offer or perhaps because your credit score has taken a hit since you first took the mortgage out.
…But it’s important to be aware that…
- A secured loan is a big step. Since you’re putting your home on the line, you need to be serious about improving your financial situation and you need to take the time to understand the risks and benefits. The process takes a little longer in any case, because the lender will need to check the value of the asset being used as security. Secured loans also involve relatively large fees, but this tends to be offset by competitive interest rates.
To get an idea of the amounts and rates available to you with a secured loan, a good broker or loan matching service can help you understand your options and guide you through the process.
Compare secured loan quotes based on your specific situationA guarantor loan
How does it work?
If you have bad credit, you can ask a friend or relative to act as your “guarantor”. This means they promise the lender that they’ll repay the loan in the event that you don’t. By applying with a guarantor, you may be able to access larger sums or lower rates than you would alone. Your guarantor will need to have good credit and will need to understand and be comfortable with what they’re getting into.
Aside from the guarantor, these loans are comparable to unsecured personal loans, in that you’ll draw down a pre-agreed lump sum, get a fixed interest rate and pay a fixed amount every month until the loan has been repaid.
Is it suitable for me?
A guarantor loan might be a suitable way for you to consolidate debt if…
- You have a low credit score that makes it hard to get approved for credit products, but you have a friend or relative with good credit, who’s willing to back you up. Both you and your guarantor need to be able to afford the repayment schedule. Guarantor loans are typically available for sums of £500-£10,000, but each application will be considered on its own merit.
…But it’s important to be aware that…
- Guarantor loans come with high interest rates – typically upwards of 30% p.a. Because of this, it’s worth checking if other options are open to you first.
You can use a good loan matching service to check your eligibility for guarantor and non-guarantor products at the same time. This process takes less than five minutes.
Use Finder’s eligibility checker to find guarantor and unsecured loans you’ll get approved for
Remortgaging
How does it work?
Remortgaging involves switching to a new mortgage product with different terms. It’s normally a smart idea to remortgage every few years regardless of debt consolidation, to ensure you’re getting the best rates available to you (especially if your credit score or income has gone up, or your loan to value – the amount you’re borrowing compared to the value of your home – has gone down). But wanting to consolidate debt could be the catalyst to prompt you to do this sooner. Many people don’t realise they’re paying more than they need to on their mortgage and that switching to a new lender could make a big difference.
Is it suitable for me?
Remortgaging might be a suitable way for you to consolidate debt if…
- You own a home and have built up sufficient equity to allow you to negotiate a new mortgage. Of all the options described in this guide, for many people, remortgaging is likely to be the one that can offer access to the largest sums.
…But it’s important to be aware that…
- A £10,000 loan paid off as part of your mortgage over, say, 20 years, is usually going to work out much more expensive than a £10,000 loan paid off over, say, three years. There are also likely to be costs involved in remortgaging, like product and valuation fees (or even exit fees, if you wish to exit a fixed-rate agreement), but there could actually be savings involved too if you’re not currently receiving the best rates you’re eligible for. As ever, it’s worth crunching the numbers before you make your decision.
Learn more about remortgaging and compare lenders
Calculating the costs
Before you make a final decision on which course of action to take, make a list of your debts, what they’re costing you each month and overall, and what it would cost you to exit each debt. Work through them to identify which would be cheaper (either each month or overall, but ideally both) if they were consolidated into a new loan. Start with your most expensive debts first.
As part of the process, it’s also a smart idea to look at your other outgoings to see where you can reduce costs. Take a look at your direct debits to see what goes where each month. This could mean switching to a new energy provider or cancelling a gym membership for example.
Are government debt consolidation loans available?
No, however there are other types of government support available to you, ranging from free advice through to “individual voluntary arrangements” (IVAs), “debt relief orders” (DROs) or bankruptcy. Solutions like IVAs really come into play when the debt is simply insurmountable, and none of the debt consolidation tools described in this guide would offer a realistic, viable way out of debt.
Do debt consolidation loans hurt your credit score?
No, if used correctly (in other words providing you meet the repayment schedule), a debt consolidation loan should benefit your credit score overall. As a general rule, using debt responsibly builds a positive credit history. By simplifying your monthly debt repayments, it should be harder to miss a repayment – which is what does the damage to your credit record.
Debt consolidation and your credit score
The bottom line
Ultimately, if a debt consolidation plan doesn’t lead to you getting debt-free as soon as possible through affordable monthly payments, it’s not a wise course of action. Although it might not be the most fun exercise, it’s smart to get out your pen, paper and calculator to weigh up the costs of each option.
Still confused?
You can access free advice at the government’s website, MoneyHelper. If your debt is simply not manageable, a debt advisor can help find ways to manage debts even if you have no spare money.
Frequently asked questions
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Will debt consolidation hurt my credit score?
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