What is Debt Consolidation?

Debt consolidation is when you have more than one debt to pay off, so you decide to combine your debts to pay them off together rather than repaying them separately. In order to do this, most people will decide to take out a debt consolidation loan. With a debt consolidation loan, you get a single, larger loan used to pay off all of the smaller loans you have taken out after combining them, thereby avoiding paying multiple interest rates on multiple products.

Debt consolidation loans are great for people who have borrowed from various sources and are looking to get a handle on their finances whilst potentially making substantial savings on interest rates.

How Does Debt Consolidation Work?

Debt consolidation involves applying for a new, single loan product, using that loan to repay your outstanding debts, and then finally repaying your consolidation loan. The amount of money you borrow must be enough to pay off the amount you owe when all of your debts are combined.

The repayments are usually made monthly by the borrower to a single lender in the form of a lump sum; therefore, the interest paid is only on one transaction, rather than many. Debt consolidation means that you are paying one larger sum on the same day each month rather than smaller ones throughout the month. If paying a single, sizeable amount works better for you, then debt consolidation may be a viable option.




The incentive for taking out a Debt Consolidation Loan is that, even if you end up paying for an extended term, you may save on the amount of interest you pay. Interest rates on small loans (such as payday loans) are often higher than larger loans.

However, this does not mean that you will definitely end up paying less on interest in the long run. Because debt consolidation loans are usually a significant amount of money, your repayment period will likely be longer than it would be if you did not consolidate your debts. The longer the repayment period, the more interest you will be paying.

You should try to calculate whether or not you will save on overall interest payments before consolidating your debts, with both repayment terms and individual interest rates in mind.


Debt Consolidation Loan Example

We can look at a simple debt consolidation loan example to see how it works in practice. Let’s say that Lucas has an outstanding car loan. He also has two credit cards with outstanding balances that he needs to repay. Plus, Lucas still has some debt from an old personal loan he took out to cover the cost of his holiday.

That means that he has four sources of debt and four separate payments to keep up with each month. Not only that, but each source of debt may have its own interest rate. Some rates can be better than others, and it can be challenging to keep track and know which debt he should pay off first.

By learning how to get a debt consolidation loan and applying for debt consolidation with a bank or private lender, Lucas, in this example, will merge all four of his debts into one single debt. So he’ll just make one monthly payment towards paying off everything. What’s more, Lucas will have one single interest rate too.

Debt Consolidation Loan Advantages and Disadvantages

There are both pros and cons to consider when asking oneself, “Should I get a loan to consolidate debt?”


  • Simplicity: One of the best aspects of debt consolidation loans is that they’re much easier for people to manage. It’s simple to make one payment each month instead of two, three, four, or more.
  • Better Rates: Often, debt consolidation loans APRs are lower than the interest rates for credit cards or payday loans. So you can pay less interest in the long term with this form of loan.
  • Credit Score: Getting debt consolidation is an excellent way to boost one’s credit score. It’s easier to keep up with repayments, so there’s less chance of missed payments and credit score drops.
  • Getting Out of Debt: Ultimately, someone applying for debt consolidation loans aims to get rid of their debt sooner. As long as you keep up with payments, this can happen.


  • Risks: There are always risks when it comes to loans and debt. If you miss payments or can’t keep up with debt consolidation, you could risk fees, penalties, or even loss of assets if the loan is secured.
  • Fees: There are often initial fees to set up your debt consolidation loan. So you will need to have some extra funds available when starting with the consolidation process.
  • You Might Pay More: Consolidation isn’t always the best option. In some cases, you might be able to pay off your existing debts sooner at the current rate rather than having them consolidated. So it’s essential to do your calculations and work out if you should get a debt consolidation loan.


Debt Consolidation Loans and Bad Credit

Many people wonder about debt consolidation loans for poor credit or if it’s possible to get debt consolidation loans with bad credit. Well, you actually can take out a debt consolidation loan with bad credit. However, it will be more difficult for you to find a lender, and there may be some challenges along the way.

When it comes to bad credit debt consolidation loans, lenders often charge higher rates of APR. They might also only offer you a secured debt consolidation loan, so you’ll have to risk your home or car against the loan. On the bright side, if you can keep up with repayments, you may be able to strengthen your credit score over time with debt consolidation loans.


Secured Debt Consolidation Loans

You will typically find that most debt consolidation products take the form of secured loans, which are when the loan is secured against a valuable asset of yours. The asset is usually your come or your car, which will then be used as collateral if the loan is not repaid. Because the loan is secured against an asset with a secured loan, the lender’s risk of approving you as a customer is greatly reduced, which means that the rate of interest offered by the lender can be much more competitive than that offered in unsecured loans products.

Most debt consolidation loans are used to pay off multiple unsecured loan products that come with relatively high-interest rates.

Unsecured Debt Consolidation Loans

If you do not have an asset to secure your loan against, or if you simply do not want to take the risk of having collateral, then you may still be able to get a debt consolidation loan in the form of an unsecured loan. Student loans, credit card debts, and other loans can sometimes be combined into an unsecured product, although the interest rates will not be as competitive as a secured loan. As someone who already has multiple debts, getting an unsecured debt consolidation loan could be harder than a secured one.

Is a Debt Consolidation Loan Right for Me?

A debt consolidation loan is a good option for you if you have several debts to repay (such as multiple credit cards) and are looking to repay them in a convenient monthly sum which may allow you to save on interest rates.

If you have trouble keeping up with multiple repayments from an organisational point of view, then a debt consolidation loan may be the product for you. Although the term of your repayment period will likely increase, you will be able to avoid the risk of forgetting to make one of your payments, which could result in an expensive fine.

Many loans providers will have individual terms and conditions with regards to repaying your debts with them. You could be charged early repayment fees for having used a debt consolidation loan to pay off your existing debts before your final repayment, which you had previously agreed upon.

If your credit score is not perfect, payday loans for bad credit may be one way to get access to finance but also an expensive form of debt.

Debt consolidation loans do not reduce the initial amount of debt that you owe. Still, they may be able to make that debt more easily repayable by potentially offering you improved repayment terms and lower interest charges.

Daniel is a loans expert based in London and has been working in the payday loans industry since 2010.