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Table of Contents
- Debt consolidation: cheapest rates to combine debts
- What is debt consolidation?
- What is a debt consolidation loan?
- Types of debt consolidation loan
- How do debt consolidation loans work?
- What debts can I consolidate using a loan?
- Pros and cons of a debt consolidation loan
- Are loans the only option for debt consolidation?
- How much does a debt consolidation loan cost?
- Should I consolidate my debt?
- Can you get debt consolidation loans for bad credit?
- How to get free advice before consolidating debt
If you’re repaying multiple debts to different lenders, you might consider consolidating some or all by taking out a debt consolidation loan.
While consolidating debts can sometimes help your situation, it can also come with considerable risks. It’s important to fully understand whether it’s suitable for your circumstances.
Other loans may be available in the UK loans market that are not included in this service.
Debt consolidation: cheapest rates to combine debts
In the table below, you can see the cheapest personal loans based on a representative example of up to £10,000 repaid over five years.
What to consider when comparing loans for debt consolidation
It’s typical to consolidate debts with the aim of making your overall borrowing cheaper. To do this, you’ll want to make sure you’re getting the best loan rate for your financial situation.
The actual amount you need for debt consolidation may be higher or lower than £10,000. Make sure you only apply for what you need and if you can comfortably afford your new monthly repayments. You can ask lenders how much it will cost to settle your existing debt, which should take into account any charges for interest and early repayment.
Your personal Annual Percentage Rate (APR) will depend on how much you need to borrow, the length of time you choose to pay it back over, your credit score and your financial situation. The loans in the table below have stricter eligibility requirements than specialist loans for bad credit.
Provider | Representative APR | Loan Amount | Available Term | NerdWallet’s Rating | |
|---|---|---|---|---|---|
 | 6.1%* | £3,000 to £35,000 | 1 to 10 years | 5.0 / 5 | |
 | 6.2% | £300 to £50,000 | 1 to 7 years | 5.0 / 5 | |
 | 6.2% | £1,000 to £25,000 | 1 to 5 years | 4.5 / 5 | |
 | 6.2% | £1,000 to £25,000 | 1 to 7 years | 3.5 / 5 | |
 | 6.6% | £1,000 to £50,000 | 1 to 10 years | 4.5 / 5 | |
 | 6.6% | £1,000 to £25,000 | 1 to 8 years | 3.5 / 5 | |
 | 6.7% | £1,000 to £50,000 | 1 to 7 years | 4.5 / 5 | |
 | 6.9% | £1000 to £25,000 | 1 to 5 years | 3.5 / 5 | |
 | 6.9% | £1,000 to £35,000 | 2 to 7 years | 3.5 / 5 | |
 | 8.7% | £1000 to £25,000 | 1 to 7 years | 4.0 / 5 |
* People with a Clubcard receive a preferential rate – the representative APR for non-members is 6.5% for the same amount and term.
A loan from John Lewis Money is provided by Zopa Bank.
» MORE: Compare the best personal loans UK
Important information: APR is checked weekly with data supplied by the independent financial information service Defaqto. We haven’t included products with limited availability, for example, they are only available to existing customers or limited solely to homeowners. We aim to provide accurate information but prices, terms and conditions of products and offers can change, so double-check first. Our Star Ratings do not consider the product provider’s lending rates and therefore do not reflect how much it costs to borrow from the reviewed brand. Loan rates can be dependent on your personal circumstances and specific loan requirements.
What is debt consolidation?
Debt consolidation works by taking out a form of credit to pay off some, or all, of your existing debts. Your existing debt may include loans, credit cards and overdrafts. Consolidating debts means you can focus on paying off one debt in place of those being consolidated.
A loan to consolidate debt may be an option if you want to combine multiple debts into one monthly repayment, but it won’t be the right choice for everyone.
Depending on your situation, debt consolidation could help you to lower the amount you pay in interest. For example, if you’re currently paying off several short-term loans that have high Annual Percentage Rates (APRs), consolidating them with a personal loan that has a lower APR could cost you less overall.
Consolidating debts could also allow you to reduce your monthly payments, though this may mean you need to pay more in interest overall if you repay the new loan over a longer period.
What is a debt consolidation loan?
Debt consolidation loans aren’t a type of loan. Instead, debt consolidation just refers to how you intend to use the loan. Even if lenders advertise debt consolidation loans, they’re no different to normal personal loans and work in the same way.
When you consolidate your debt using a debt consolidation loan, you only need to make a single monthly repayment to one lender rather than keeping track of multiple payments.
Here’s an example:
- You owe £2,000 on a credit card, £2,500 on a loan, plus you have a £500 overdraft.
- You may be able to apply for a new loan of £5,000 to pay off these debts.
- You would then repay the new £5,000 loan in instalments to one lender over the agreed term.
When you apply for a loan, you’ll typically be asked what you want to use the loan for. You’ll need to choose the ‘debt consolidation’ option.
Types of debt consolidation loan
When taking out a loan to consolidate debt, you can choose between an unsecured or secured debt consolidation loan.
It’s likely that your choice will be influenced by the amount you need to borrow, your credit history and how long you want to pay back the loan over.
An unsecured debt consolidation loan isn’t secured against any asset, such as your home or vehicle.
The rate you’re offered depends on your credit history, your finances, and the terms and conditions of the lender.
Depending on the amount you need to borrow, you can typically choose to pay back an unsecured debt consolidation loan over between one and seven years.
If you’re not eligible for an unsecured loan from a mainstream lender, you may be eligible to apply for a loan from a specialist bad credit loan provider.
If you do have adverse credit, you should think carefully about whether debt consolidation is right for you. Your debt could become more costly, because interest rates for bad credit loans are often much higher than regular loans.
It’s important to crunch the numbers to work out whether debt consolidation will be cheaper for you in the long run. If the APRs on your existing debts are higher than the APR you could get on a new loan, your overall borrowing will likely be less expensive. You should ask for settlement figures from your existing creditors, which factor in any interest or early repayment charges.
It’s a good idea to get free debt advice from a debt charity before going ahead.
A secured debt consolidation loan is secured against an asset, usually your home.
Because you’re using your property as security against the debt, the lender may offer larger loans at lower interest rates, as well as consider applications from people with poorer credit histories. You may also be able to choose to pay back a secured loan over a longer term than an unsecured loan.
You should think carefully before applying for a secured loan for debt consolidation. If you miss any repayments, you risk losing your home, so it’s important not to make this decision lightly. You also need to consider that you may be consolidating less risky unsecured debt into riskier secured debt.
You may be able to find secured loans that use your vehicle as security.
How do debt consolidation loans work?
Before comparing debt consolidation loans, you need to work out how much you owe across all your debts. Ask your lenders for a settlement figure, which is the amount you need to pay to clear your debt, including any early repayment and interest charges.
When you have these figures, add them up to work out how much you need to borrow to clear your existing debt. After that, these are the next steps:
- Compare loans based on the amount you need to borrow to consolidate your debt. It’s important that you only borrow the amount you need, this could be a £5,000 loan or £10,000 loan for example. The best loans allow you to borrow what you need, at the cheapest rate you can get based on your credit score and financial situation and repay it over the shortest term you can while still affording the monthly repayments.
- Check the lender lets you use the loan for debt consolidation before applying. It’s also a good idea to check your loan eligibility, which helps limit the number of applications you make. Checking your credit score helps you understand your eligibility too. It can damage your credit score if you make too many applications for credit over a short time.
- If you’re confident about being accepted for the loan, you can apply. Have your personal details and information about your income, employment status and expenses to hand. The lender uses this information and data from your credit report to decide whether to offer you a loan.
- You can then use the new loan to pay off your existing debts. If your application is accepted, you use the money to settle your outstanding borrowing. You then repay this new loan as specified in your loan agreement, making a single monthly repayment instead of multiple payments to different lenders.
» MORE: How to get a loan
What debts can I consolidate using a loan?
You can consolidate a number of outstanding debts into one loan, including:
- overdrafts
- credit card debt
- payday loans
- short term loans
- personal loans
Pros and cons of a debt consolidation loan
Debt consolidation can be useful, but it isn’t always the right option. Consider the advantages and disadvantages before deciding whether to consolidate your debts using a loan.
Benefits of a debt consolidation loan
Potential advantages of consolidating your debts include:
- You may be able to get a loan with a lower interest rate.
- It may be easier to manage one debt with one lender rather than multiple debts with different lenders.
- You may be able to reduce your monthly repayments, although you may pay more overall if you repay the loan over a longer period.
Risks of a debt consolidation loan
Potential disadvantages of debt consolidation loans to consider are:
- You could end up paying more overall if the APR on your new loan is higher or you repay it over a longer period.
- You need to factor in any early repayment and interest charges on existing loans.
- Applying for a debt consolidation loan will usually involve a hard credit check, which will be recorded on your credit history.
- If you continue to borrow while paying off a debt consolidation loan, you risk getting caught in a cycle of debt.
- If you use a secured loan to consolidate debt, your property or other asset is at risk if you can’t keep up with repayments.
- You could end up paying more overall if the APR on your new loan is higher or you repay it over a longer period.
- You need to factor in any early repayment and interest charges on existing loans.
- Applying for a debt consolidation loan will usually involve a hard credit check, which will be recorded on your credit history.
- If you continue to borrow while paying off a debt consolidation loan, you risk getting caught in a cycle of debt.
- If you use a secured loan to consolidate debt, your property or other asset is at risk if you can’t keep up with repayments.
Are loans the only option for debt consolidation?
Loans aren’t the only option for managing your debt.
If you have several credit card balances, you can consolidate them into one credit card by using a balance transfer. Many credit card providers offer a 0% credit card for balance transfers. This is interest free for a certain period, helping you save if you’re paying expensive interest on multiple credit cards. You need to meet the terms of the card and pay off your balance in full before the lower rate expires.
However, these cards usually charge a balance transfer fee of between 2% and 4% of the amount you’re moving across. It’s important to consider this fee when you’re working out whether consolidating credit card debt using a balance transfer will save you money.
You could consider using savings to pay off debt, avoiding the need to borrow more. If you’re thinking about doing this, be sure to check how much it will cost to settle your existing debts in terms of early repayment and interest charges, and whether you’ll still have access to funds that you can use in an emergency.
Using savings to pay off debt will likely save you money in the long run. But it’s still important to do the calculations by comparing your settlement figures against the total cost if you were to continue making repayments normally.
Keep in mind that depending on the type of savings account you have, your provider may charge you a fee to withdraw money.
You could consider asking a close friend or family member for money to settle some or all of your existing debt.
This will likely save you money in the long run, but check that any early repayment or interest charges won’t cost more than if you were to continue making your regular payments.
Depending on the type of relationship you have with your friend or family member, you could consider writing a contract so it’s clear how you’ll repay the money. This can help avoid any conflict later on.
If you’re already finding it difficult to keep up with a number of monthly payments, applying to borrow more may not be the best solution. Debt charities can give you free advice on dealing with debt and help you set up an agreement between you and your creditors to make your repayments more affordable.
This is called a debt management plan (DMP) and is usually based on a budget that the service helps you complete. Debt charities include:
- Citizens Advice
- National Debtline
- StepChange
These services can also advise you on other solutions, such as an individual voluntary arrangement (IVA).
» MORE: Paying off a loan early
How much does a debt consolidation loan cost?
You can estimate how much a debt consolidation loan will cost by using a loan calculator. These are often available at lenders’ websites, or you can use NerdWallet’s loan calculator.
The total cost of the loan depends on:
- your annual percentage rate (APR), which represents the yearly cost of borrowing including interest and fees
- how much you want to borrow and how long you want to pay it back over
- interest or early repayment charges, if you think you’ll be able to settle the loan earlier than the agreed term
Will a debt consolidation loan save you money?
It’s important to compare the cost of your existing loans against how much you’ll repay on the new single loan. To work out whether debt consolidation could save you money, you need to know:
- how much you’re set to repay overall on your existing debts
- how much it’ll cost to pay off your debts early, in early repayment fees and charges
- how much you’ll pay overall on the new loan and whether you can afford the monthly repayments
If your new APR is lower than your existing loan rates and early repayment charges don’t cancel out the money saved, consolidating your debts could save you money.
Bear in mind that your credit score will affect the interest rate you qualify for and those with good credit scores are likely to access lower rates of interest.
It’s also important to consider the length of the repayment term on your debt consolidation loan. A longer repayment term may reduce your monthly payments, but you can end up paying more in interest, which wouldn’t save you any money overall.
Should I consolidate my debt?
You may want to consider debt consolidation if:
- you have multiple debts
- you’re paying a higher interest rate on these debts than you could get by applying for a loan now, for example if you’ve since improved your credit score
- any money you can save on interest isn’t outweighed by early repayment charges
- the total amount you’ll repay with the new loan is less than the total amount payable on your existing debts
- you prefer to have one monthly repayment to keep track of, instead of multiple payments
If you choose to take out a debt consolidation loan, you need to be disciplined and make sure you stay on top of your payments. Taking out credit to pay off credit can be risky and could make your situation worse if you continue to use your credit cards and borrow more money.
It’s important to calculate exactly how much you can realistically afford to repay each month, to make sure you don’t borrow beyond your means. You can use a loan calculator to help with this.
If you’re struggling with your existing loan payments, taking out more credit is unlikely to be the best option. You should contact your current lenders to see if you can come to an alternative payment arrangement.
It may also be worth contacting a debt charity for advice on your situation. Asking for advice is free and won’t affect your credit score.
Can you get debt consolidation loans for bad credit?
You may be able to get a debt consolidation loan if you have a bad credit history. However, people with bad credit are likely to be charged a higher rate of interest than those with better credit histories, so it may not make financial sense to consolidate your debts.
If the interest rate on a consolidation loan is higher than the rate on your existing debts, then it will probably cost you more to consolidate your debts. Here are three steps to take before applying for a debt consolidation loan with bad credit:
- Look at loans available that you’re likely to be accepted for. Do they suit your situation? For example, you may find it easier to get a secured loan if you have a bad credit score, but this comes with the risk that the lender could repossess your property if you fall behind with payments.
- Before applying for a loan, work out all the costs involved. You can see if it would save money by consolidating your debts, because with higher interest rates and longer loan terms, you may end up paying more. Crucially, work out whether you would be able to afford the repayments.
- Consider your own relationship with borrowing. For example, do you consistently have trouble making repayments, and are you likely to borrow more outside of your debt consolidation loan, creating repayments to more lenders – and a cycle of debt?
If you’re struggling with debt you should seriously consider whether debt consolidation is right for you.
Instead, you may be better off finding an alternative solution. This might involve getting debt advice or contacting your lenders to explain that you’re finding it hard to repay your debt.
Does debt consolidation hurt your credit?
Because debt consolidation involves an application for a loan, most lenders will conduct a hard credit check that will be recorded on your credit history.
Multiple hard credit checks in a short space of time can affect your credit score. As a result, you should aim to minimise the number of applications for credit you make, and carefully consider whether you’re likely to be accepted before applying.
However, as long as you make all the repayments on your debt consolidation loan, as well as meeting all your other credit commitments, you can improve your credit score.
Bear in mind that if you close a credit card after paying off the balance it can also affect your score. Even though closing a credit card can stop you from building up debt on it, it also means you have less available credit and a higher credit utilisation ratio.
What is a credit utilisation ratio?
A credit utilisation ratio tells you how much of your total available credit you are currently using. For example:
- If you have three credit cards, two with a £3,000 credit limit and one with a £2,000 credit limit you have an overall credit limit of £8,000
- If you add up what you owe across all of these cards and the total is £4,000 you are using half of your available credit.
- But if you don’t use the credit card with a £2,000 limit, meaning your balance on it is zero and you close this unused credit card, you will still owe £4,000. Your debt is still spread over the two cards but your available credit limit will drop to £6,000.
- This means you’re using two-thirds of your available credit – a higher credit utilisation ratio than when you were using half.
A lower credit utilisation ratio is typically better for your credit score.
How to get free advice before consolidating debt
You may be considering debt consolidation if you’re struggling to keep up with several monthly repayments, but borrowing more money won’t always be the right solution.
If you’re struggling with debt, there are free charities that can help. These include StepChange, National Debtline, and Citizens Advice. Advisers at these charities can help you budget and come up with a plan to repay your creditors. You could also apply for ‘breathing space’ with your lender which can stop your debts growing while you seek debt help or a Debt Arrangement Scheme if you’re in Scotland.
Image source: Getty Images
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