Debt consolidation is when you merge some or all of your existing debts into one.
One of the most common forms this comes in is as debt consolidation loans (which are unsecured personal loans that you use to pay off your debt).
Whichever method you choose, debt consolidation involves moving multiple debts, whether that’s finance, credit cards or loans, over to one account. Consolidating your debts can simplify repayments, making budgeting easier to manage. Plus, it can even save you money in interest depending on the rate and term of the loan.
For example, if you have two loans, a store card and two credit cards totaling £10,000, you’ll need to make five separate repayments every month. By taking out a debt consolidation loan for £10,000, you can pay off the outstanding balances in full and then pay back the loan with a single monthly repayment which lenders may offer at a lower interest rate than your current cards or loans.
However, consolidating your debt may not always be the best option for you. You’ll need to consider the interest rate and the term (length) of the new loan as you could end up paying more in the long run.
Debt consolidation can make your existing debts more manageable by reducing the number of regular repayments you make.
When consolidating debt, you need to make sure the total amount you owe won’t end up being higher than your existing agreements.. It’s only an effective option if you’ll pay less than (or the same as) what your cumulative debts would add up to if you continued repaying them individually.
That’s why it’s important to look at the rate (APR) and term a lender offers you when consolidating your debt. For example, if the APR of a debt consolidation loan is higher than any of your existing loans or cards, you may end up paying more in the long term. A lower APR can reduce the amount of interest you will accumulate (and need to repay), saving you money which means you can pay your debt off faster. However, make sure you check the term of the loan as a lower rate over a longer period of time could mean you pay back more in the long run.
The APR a lender will offer you will likely depend on your credit score. The better your credit score, the more opportunities you could have for better rates. A more attractive, lower APR could make consolidation a viable option to save money. You may want to improve your credit score before consolidating debt to receive a better rate. Read our ultimate guide to credit checks and searches for more information.
If you have a poor credit history, getting a debt consolidation loan can be difficult.
It may still be possible to get a loan, but it will most likely need to be secured against an asset, such as your home. This type of loan is known as a secured loan or second charge mortgage.
At Shawbrook, we offer unsecured loans to support with debt consolidation. Because of this, we are unlikely to lend to you if you have a poor credit score. If you meet our eligibility criteria, you can still apply for a free, personalised quote. If we’re able to offer you a loan, you can then decide whether to accept the rate.
Taking out a debt consolidation loan is just one way of consolidating your debt; another common option is to transfer existing balances onto a single credit card (known as a balance transfer).
Alternative options include home equity loans. These involve borrowing against the equity in your home and using this loan to pay off your debts. Home equity loans are secured against your property, so your home could be repossessed if you fail to make repayments.
If you feel your debt is unmanageable, you should look to speak to an experienced debt adviser. You can take many different avenues to get your debt into a more manageable place, and debt advisers will guide you through and suggest the best options for you and your situation.
Debt advisers will never judge you and are always happy to talk through both big and small problems. Their advice is available for free, and they can help you with how to pay off debt and become debt free. For more information on the different options, read our ultimate guide to debt consolidation loans.
Remember, if you are struggling to cope with money, you can talk to a debt charity, such as StepChange. Charities like these can offer free, impartial and confidential advice and practical support for fee-free debt management plans.
If you think a loan may be the right option for you, explore further on our dedicated debt consolidation loans page.
At Shawbrook we’re transparent with everyone that applies for a personal loan with us. When you apply for a quote, we’ll provide you with a personalised rate without affecting your credit score so you can make an informed decision before you apply for a loan.
All loans are subject to status. The interest rate offered will vary depending on our assessment of your financial circumstances and your chosen loan amount. Terms and conditions apply.