Managing multiple debts can be overwhelming. If you have credit cards, overdrafts, store cards, and personal loans, all with different interest rates and repayment dates, keeping track of what you owe can feel like a full-time job.
A debt consolidation loan won’t reduce the amount you owe, but it can help you manage it more effectively. For some borrowers, other financial solutions such as private bank mortgages or bespoke lending products may also be worth exploring, depending on your circumstances. While it doesn’t erase your debt, it may make repayment easier to manage – and if the new loan has a lower interest rate, it could even save you money. But is it always the best choice? Let’s explore.
How Debt Consolidation Works
A consolidation loan is essentially a new personal loan used to pay off your existing debts. For example:
- £1,200 overdraft
- £3,500 credit card
- £4,000 personal loan
- £800 store card
Instead of paying four lenders separately, you borrow £9,500 to clear them all. You’re then left with one fixed monthly repayment over a set term, usually between one and five years.
This approach won’t reduce the balance, but it offers clarity: one rate, one payment date, and a clear end point.
Benefits of Debt Consolidation
- Simplicity: One payment to manage, reducing stress and the risk of missed deadlines.
- Structure: Loans have fixed terms, so you know exactly when the debt will be cleared.
- Potential savings: If your new loan’s APR is lower than your blended current rate, you may pay less overall.
- Peace of mind: Many borrowers find the psychological benefit of having just one debt to focus on invaluable.
Potential Drawbacks
- Higher cost risk: If the new APR is higher, or the loan runs over a longer term, you could pay more in total interest.
- Early repayment charges: Clearing an existing loan early can trigger penalties.
- Bigger monthly outgoings: Overdrafts and cards often let you pay just interest. With a consolidation loan, you’re repaying the principal too — so instalments may rise.
- Discipline required: Clearing cards to £0 looks great — until you start spending again. Running balances back up leaves you worse off.
Most importantly, consolidation only works if you change your habits. If you clear your credit cards with a loan but then continue to spend on them, you could quickly end up in a deeper hole: one big loan on top of new credit card debt.
Types of Consolidation Loans
- Unsecured personal loan
Most people take out an unsecured personal loan. These are not tied to your home, but missed repayments can harm your credit score and future borrowing prospects.
- Secured loan
The alternative is a secured loan, often advertised as a “homeowner loan.” Here the debt is linked to your property. While this can sometimes mean cheaper monthly repayments, it carries far greater risk — if you fail to repay, your home could be repossessed. Secured loans also tend to be longer-term, meaning you could pay much more in interest overall.
Alternatives to Consider
- 0% Balance transfer cards
Before considering a consolidation loan, you could also review whether other financing strategies, such as commercial mortgage solutions, might provide greater flexibility for your needs. If most of your debt is on credit cards, a 0% balance transfer card could allow you to move your balances to a single card and pay no interest for a fixed period. This can be much cheaper than a loan, provided you set a plan to clear the balance before the interest-free window ends.
- 0% money transfer card
If you’re dealing with overdrafts or high-cost loans, a 0% money transfer card may be another option. This allows you to transfer money directly into your bank account to clear existing borrowing, then repay the card at 0% interest.
However, these options require discipline. Credit cards don’t force you to make fixed repayments, so it’s vital to set up a standing order to ensure the balance is cleared on time.
- Free debt advice
For those already struggling to meet minimum payments, a consolidation loan may not be the right step. Instead, speaking with a free debt charity such as StepChange, National Debtline, or Citizens Advice can provide tailored support and alternative solutions.
Comparison: Which Option Fits?
| Option | How it Works | Pros | Cons | Best For |
|---|---|---|---|---|
| Debt Consolidation Loan | One loan replaces several debts | Fixed term, one payment, clear finish | Can cost more if APR high/term long | People who want structure & discipline |
| 0% Balance Transfer Card | Move card balances to 0% | Cheapest if cleared in time | Fee, needs good credit, discipline | Mainly credit-card debt |
| 0% Money Transfer Card | Cash into bank to clear overdraft/loan | Cheaper than overdrafts/loans | Fee, variable repayments | Overdrafts or high-cost debt |
| Secured Loan | Tied to your home | Larger sums, lower monthly | Home at risk, more interest long-term | Homeowners with limited options |
When a Consolidation Loan Can Work
A consolidation loan may be worth it if:
- You qualify for a lower APR than your current blended rate.
- The monthly repayment fits your budget without needing new borrowing.
- You close or reduce cleared credit lines to avoid temptation.
- Early repayment fees on old loans don’t outweigh savings.
For many, the clarity of having one loan with a clear end date is worth it. For others, especially those with access to 0% credit cards, cheaper routes may exist.
Final Thoughts
A debt consolidation loan can simplify your finances, reduce stress, and sometimes lower your borrowing costs. But it’s not a quick fix — and it won’t work unless you also change the habits that led to debt in the first place.
If you go ahead, make sure the new loan is genuinely cheaper, borrow only what you need, and resist running up old credit lines again. Explore 0% card options first, and if repayments are already a struggle, seek free debt advice before signing any agreement.
Used wisely, consolidation can be the first step toward becoming debt-free. Used carelessly, it risks becoming just another layer of borrowing.
If you’re unsure whether consolidation is the right step, seeking professional advice is vital. At MillionPlus, we connect clients with tailored solutions in areas such as bridging finance and development finance to help manage complex financial situations.
FAQs
Does consolidation hurt my credit?
Applying creates a search on your file, and at first you appear to have more available credit. Once you pay off old balances and they update, your utilisation can improve. Missed payments on the new loan will damage your score.
Should I keep my credit cards after consolidating?
If temptation is an issue, close or reduce limits. If you keep one for emergencies, keep the limit low and pay in full monthly.
Is a secured loan safer because payments are lower?
Lower monthly payments don’t mean safer. With a secured loan, your home is at risk if you fall behind, and longer terms can mean much higher total interest.
What if I can’t get a low-enough APR?
Consider 0% balance/money transfer options or seek free debt advice. A high-APR consolidation loan can increase your total cost.
How much should I borrow?
Only the exact amount needed to clear targeted debts (plus any settlement fees). Borrowing extra inflates interest and delays becoming debt-free.
Can I use a mortgage instead of a debt consolidation loan?
In some cases, homeowners may be able to release equity through a remortgage or specialist product. You can learn more about options like large mortgage loans and high net worth mortgages, which may suit borrowers with significant property assets.
