What Is A Debt Consolidation Loan?

What is a debt consolidation loan?

By Matt Fernell, Editor-in-Chief at Finance.co.uk. Published 29th November 2023.

Matt Fernell

Debt consolidation loans can help you get on top of your debt and reduce your monthly payments. Here's everything you need to know about how they work.

Having multiple debts can be expensive and challenging to manage. A debt consolidation loan can help you manage your existing debts by consolidating them into one lower monthly payment.

You’ll need to apply for a loan large enough to pay off the total balance of your existing debts, whether that’s credit cards, loans or overdrafts.

How do debt consolidation loans work?

Debt consolidation loans are a way to pay off your outstanding debts and consolidate them into one manageable payment. When you owe money to multiple lenders, you’ll not only be paying back what you’ve borrowed but also different interest charges.

Combining your current debts with a consolidation loan can reduce your monthly repayments and save you money on interest.

Here’s how debt consolidation loans work:

  1. Work out how much you owe - Include all your debts like loans, credit cards, overdrafts and store cards. The total will be the amount you’ll need to borrow from a debt consolidation lender.

  2. Use the consolidation loan to pay off debts - Once your application is approved, you can use the money to pay off your existing debts.

  3. Stay on top of your payments - Once you’ve paid off all your existing debts, you’ll need to keep on top of your monthly payments and pay back the debt consolidation loan within the specified term.

What can I use a debt consolidation loan for?

You can use a debt consolidation loan to pay back almost all types of debt, such as:

  • Credit cards

  • Personal loans

  • Secured loans

  • Overdrafts

  • Store cards/payment plans

Some types of debt, such as mortgages, cannot be repaid using debt consolidation loans.

What consolidation loans can you get?

There are two main types of debt consolidation loans:

Secured debt consolidation loan

This is a type of secured loan where the lender guarantees the money you borrow against your home. 

These are also often referred to as homeowner loans and are typically offered when you have a significant amount of debt or have a poor credit history.

The extra security of using your home as collateral means most lenders are willing to offer secured loans for much larger amounts, sometimes up to £500,000 or more. 

They also usually come with a lower interest rate; however, your home will be at risk if you don’t keep up with the repayments. Here's more about how secured loans work.

Unsecured debt consolidation loans

Also referred to as personal loans, this is a type of loan to pay off debt that isn’t secured against your home or other assets.

These are for smaller amounts, and you can usually get an unsecured loan of up to £50,000 to consolidate your debts. This type of loan is harder to get if you have bad credit, but it’s not impossible. Find out everything you need to know about personal loans here.

Does a debt consolidation loan affect your credit score?

When you apply for any form of credit, a hard search will be recorded on your credit report. While this may temporarily harm your credit report, staying on top of monthly payments and not making multiple credit applications should prevent long-term damage to your credit history.

Consolidation loans could reduce your chances of missing payments by offering a more manageable way to pay back your existing debts.

Something to remember when considering a debt consolidation loan is that until you’ve used the loan to pay off your current debts, you’re effectively doubling your credit utilisation, which could impact your affordability. However, as long as you use the money borrowed to clear your outstanding debts, any adverse effects on your credit report should be temporary.

By consolidating several expensive debts into one lower-interest payment, you should be able to improve your credit score. You will reduce the risk of missing payments and will be able to clear your overall debt more quickly.

Can I get a debt consolidation loan with bad credit?

Getting a debt consolidation loan for poor credit is possible. However, it’s likely the best deals and lowest interest rates may not be offered to you if you have a low credit score.

If you have a bad credit history, some specialist providers may be able to offer you an unsecured debt consolidation loan for bad credit.

You’re more likely to get a better deal by taking a secured debt consolidation loan if you own some or all of your home or another high-value asset, such as a car.

Secured debt consolidation loans don’t come without risk - it’s important to remember that missing repayments on a secured loan will put your home at risk.

Guarantor loans are also an option for bad credit debt consolidation. These are a type of personal loan which are guaranteed by a close friend or relative, who agrees to cover your debt if you’re unable to.

Find out more about getting a loan when you have bad credit here.

Are there any alternatives to debt consolidation loans?

While a debt consolidation loan can be an effective way to manage your debts, some alternatives may be more suitable for you.

0% balance transfer credit card

0% balance transfer credit cards allow you to transfer your current credit card debt to a new card, where you won’t have to pay interest for a set period - typically between 6 to 18 months. Most balance transfer cards will charge a small balance transfer fee, usually between 0-3%.

Balance transfer cards can be a great alternative to loans to pay off credit cards without accumulating interest. It is, however, essential to consider if you can completely pay off the balance before the interest-free period expires because many balance transfer cards will switch to charging high interest rates.

It’s also worth noting that the best 0% balance transfer cards are often only available to those with a good or excellent credit history, so they might not be the best option if you don’t have a good credit score.

0% money transfer credit cards

0% money transfer credit cards can be a good option if you’re looking to pay off debts such as overdrafts or loans. Money transfer cards allow you to move up to 95% of your credit card limit into your bank account, which you can use to repay these debts.

Like balance transfer cards, 0% money transfer cards won’t charge you interest for a set period but will charge a small fee when you transfer money from the card. This is typically between 1-4% of the amount you transfer.

When considering using a money transfer card to consolidate debts, it’s important to consider whether you’ll be able to pay off the card before the 0% period ends. At this point, you’ll start being charged interest on any remaining balance, which could be at a high rate.


This may not be an option for everyone, but if you have savings, using them to pay off your debts could be a good idea. Even if you don’t have enough to clear your current debts completely, paying off your most expensive debts could be a way of saving you money on interest payments without having to borrow.

In most cases, the interest you’re paying on your debts will outweigh the interest you earn on your savings account, so you’ll be better off paying down any high interest bearing debts.

The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.