If you're juggling a couple of credit cards and an overdraft, one loan with one monthly payment sounds like a relief. That's what a debt consolidation loan is: you borrow enough to pay off your other debts, then repay just the loan.
It can be a good move. It can also leave you paying more, for longer, without you noticing. The difference usually comes down to three things: the interest rate you're actually offered, how long the loan runs, and whether the old cards stay at zero.
How a consolidation loan works
You take out a personal loan, use it to clear your cards and overdraft, and then pay the lender a fixed amount each month for a fixed term, often between one and seven years. Unlike a card, the balance goes down every month and has an end date.
Most are unsecured. Some are secured on your home, which means the lender can take steps to repossess it if you can't keep up. Turning card debt into a debt secured on your home is a big step, and rarely worth it just to get a lower monthly payment.
The rate you see isn't always the rate you get
Loan adverts show a representative APR. Only 51% of accepted applicants have to get that rate or better. Everyone else can be offered more, and if your credit file has missed payments or high balances, your offer may be much higher. Use a lender's eligibility checker, which does a soft search, to see your likely rate before you apply.
Worked example: when it saves and when it doesn't
Say you owe £8,000: £4,000 on a card at 24.9% APR, £2,500 on a card at 29.9% and £1,500 overdrawn at 39.9% EAR. You pay £300 a month in total, highest rate first. You'd be clear in 3 years 3 months, paying about £3,460 in interest.
Here's how an £8,000 consolidation loan compares:
Option | Monthly payment | Time to clear | Interest paid |
|---|---|---|---|
Keep your current debts | £300 | 3 years 3 months | about £3,460 |
Loan at 9.9%, 3 years | £256 | 3 years | about £1,220 |
Loan at 9.9%, 5 years | £168 | 5 years | about £2,080 |
Loan at 19.9%, 3 years | £290 | 3 years | about £2,450 |
Loan at 19.9%, 5 years | £204 | 5 years | about £4,260 |
At 9.9% over three years, you save about £2,240 and finish sooner. But look at the last row: the monthly payment drops by nearly £100, which feels like a win, yet you pay about £800 more in interest and stay in debt almost two years longer. A lower monthly payment is not the same as a cheaper loan.
A simple way to decide
List what you owe. Every balance, rate and minimum payment. Add them to the debt consolidation calculator to see your total interest as things stand.
Check your real rate. Use soft-search eligibility checkers, and include any arrangement fee in the cost.
Pick the shortest term you can afford. Aim to pay about what you pay now. Compare total interest, not just the monthly figure.
Check early repayment terms. You can repay a personal loan early, but the lender may charge up to a month or two of interest for doing so.
Close or cut the old limits. This is the step that makes or breaks it. If the cards and overdraft fill up again, you'll owe the loan and the cards.
Alternatives worth comparing
A 0% balance transfer card can be cheaper still for card debt, if you can clear it within the 0% period. See is a 0% balance transfer worth it?
No new borrowing at all. Paying highest rate first, as in our snowball vs avalanche worked example, may get you most of the saving without a credit check.
Adding debt to your mortgage. The rate looks low, but spreading card debt over 20 years can cost far more in total, and it becomes secured on your home. See overpay your mortgage or pay off debt first?
When to get help
If you're borrowing to keep up with bills, already missing payments, or you've been turned down for a loan, a new loan probably isn't the answer. A debt management plan or other solution may suit you better; see debt management plan vs IVA.
Free, confidential advice is available from StepChange, National Debtline and Citizens Advice. They won't sell you a loan and they won't judge you. You'll find them on our financial resources page.
See your own numbers
Add your debts to the payoff calculator to see your debt-free date as things stand, then compare it with any loan you're offered.
Examples assume fixed rates, monthly compounding, payments made on time, no fees and no new spending. Card and overdraft payments go to the highest rate first. Loan rates are illustrations, not current market rates; the rate you're offered may differ. This guide is general information, not financial advice.