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Debt consolidation explained

Debt consolidation explained

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Last updated: 10 August 2021

People in debt can often find themselves in multiple repayment schemes that can be confusing to manage and make it even more difficult to get out of debt. Debt consolidation is one possible solution to this problem. Simply, it moves all of your debt into one place, and can be cheaper than paying your debts separately. This guide will take you through the basics of debt consolidation and also show you the alternatives if it’s not suitable for you.

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What is debt consolidation?

When someone is in debt, it is often to multiple different lenders and the different repayment schedules can be difficult to keep on top of. Debt consolidation acts as one solution to this and can be a useful way of helping to regulate your monthly outgoings. Consolidating your debt is straightforward, it takes all of your current debts and turns them into a single loan. This means only having to make one monthly payment towards your debts.

Like other loans, they can be secured or unsecured. If they are secured, that means your loan is insured by your high-value assets such as a car or your property, and this is what you'll likely be offered if you have poor credit history. If you've got a good credit rating, however, you may qualify for an unsecured debt consolidation loan. 

Why would I need a debt consolidation loan?

A debt consolidation loan can make it easier for you to regulate what you are spending your money on and make sure that you are paying off all your outstanding debts at the same time. However, the main reason that people do this is that it can be cheaper, as the interest for one loan can work out less than all of your debts combined. This is not always the case and you have to compare loans in order to make sure it makes sense for you to switch to a debt consolidation loan.

Pros and cons of debt consolidation


  • Debt consolidation can be cheaper than the combined interest of the payments that you are making on your separate debts.
  • A loan may be easier to manage. There is less likelihood that you will be late on your monthly repayments because it's a single payment.
  • You can spread your debt consolidation repayments over a longer period of time, making them less each month. Although be aware that if you do this you will most likely pay more interest overall.


  • It's not as simple as just moving all of your debts into one place. Like any other type of loan, it will be determined by your credit score and other factors, meaning there is no guarantee that you will get one.
  • A loan may not necessarily be cheaper and can be even more expensive. If you don't have a fixed income it might not be the best choice for you.
  • Having debt consolidation loans can look bad on your credit file and affect your chances of getting credit for other loans.

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What to look out for with a debt consolidation loan

  • It's very important to compare different loans before you take out a debt consolidation loan. There could be a cheaper option, such as a normal secured loan or even a credit card.
  • You should seek financial advice before taking out a loan such as this. If you are often falling behind on your debts it might be more useful to get a debt management plan or another solution.
  • Not everything is determined by the interest rate. You should compare the APRC for secured loans (annual percentage rate of charge), or the APR (the annual percentage rate) as this will include all of the extra costs.

    What are the other options?

    It's important to compare loans as depending on your own financial circumstances and the amount of debt that you are in, there could be a better option than taking a debt consolidation loan.

    Pay off your debts with a credit card

    One possible option is a 0% interest balance transfer card. Many credit card companies will offer you an interest free card for 2 years, allowing you to pay off the balance of your debt and give you two years to pay this off. This is a much cheaper option but is only available to those with the best credit history, so it might not be suitable for everyone.

    A debt management plan

    If you are already in a position where you may need a debt consolidation loan, taking out further personal loans is not necessarily a good idea. A good option in this case might be a debt management plan. This is an agreement between the debtor and lenders on how you can repay their debts. A debt management plan is arranged by a third-party provider and can be done for free by StepChange , Payplan and National Debtline.


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    Fergus Cole

    Author: Fergus Cole

    Fergus is a journalist specialising in the personal finance, energy and broadband sectors. He also has a passion for travel and adventure so tries to make the most of this in any spare time he gets.

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