13th April 2021 | 15 minute read

What is a Debt Consolidation Loan?

In this blog, we’re exploring everything there is to know about debt consolidation loans, including how they work, when you might consider one and the pros and cons.

How do Debt Consolidation Loans work?

Debt consolidation usually works by taking your existing debts (often with various lenders) and combining them into one loan that is payable to just that one lender. It means you can go from having multiple payments coming out throughout the month at different amounts and with varying interest rates, to having only one payment come out. Put simply, you take out a loan to the amount of your existing debt and use it to pay off that debt. 

For the most part, consolidation loans are used to help people better manage their cash flow and simplify their outgoings, as a single loan is easier to keep track of than multiple accounts or balances. Often, consolidating your debt will also mean you’ll pay less in interest and clear the balance faster than you otherwise might, depending on the specific circumstances. They’re often also referred to as a way to ‘refinance your debt’ and you can use debt consolidation loans to pay off credit cards, store cards, personal loans and overdrafts.

Why get a Debt Consolidation Loan?

People choose to get debt consolidation loans for different reasons but, overall, the main goal is often to pay off several different debts and move forwards with just one single, monthly payment (simplifying payments) or to save money by consolidating onto a lower-interest product. If you want a more structured way to manage your debts and keep track of who needs paying, when and how much, then a debt consolidation loan could be a good option. It can also be a helpful tool if you have several high-interest debts, as combining them into one singular consolidated loan may allow you to take advantage of a better interest rate. 

What types of Debt Consolidation Loans are there?

There are two types of consolidation loans, secured and unsecured. Usually, unsecured loans are offered on debts up to £25,000, and for anything over that, you’re more likely to be looking at a secured loan, though secured loans for less than £25,000 are available. The difference between an unsecured loan and a secured loan is important as secured loans may mean your home is at risk if you don’t meet payments.

Secured Consolidation Loans

A secured loan is something that is taken out against an asset (something you own), usually your house - as such they are often called ‘homeowner loans’ or ‘second charge mortgages’. The important thing to note here is that if you miss repayments, the lender can repossess whatever the loan is secured against as collateral to pay off your debt. If this is your home, then you are at risk of losing your home should you fall behind. Secured loans are usually offered if you owe a large amount of money and because they are in effect a change to your mortgage, you should seek expert mortgage or equity release advice.

Unsecured Consolidation Loans

An unsecured loan means that the loan is not secured against an asset. It’s a ‘personal loan’ and it’s just tied to you as an individual. If you fall behind with an unsecured consolidation loan, it works in the same way as falling behind on any other form of unsecured lending, such as credit cards.

When to get a Debt Consolidation Loan

Debt consolidation loans are widely available from many different providers and when to get one is down to your personal circumstances. If your existing debt has left you feeling overwhelmed or stressed, try to avoid taking out a loan on a whim, or with a provider that promises a ‘quick fix’, as there are unfortunately some companies taking advantage of people in difficulty nowadays.

If you’re struggling to pay your priority debts (think Council Tax, Rent, Utilities, etc.) then you may also benefit from formal debt advice before taking on any further credit. You can find a number of organisations and charities offering free, independent debt advice on our Debt Helplines page and their advisors will be able to consider your circumstances in more detail and suggest alternative means of paying down debt.  

You should also only get a debt consolidation loan when you’ve fully explored the options available to you, so you can compare any savings when deciding what’s best for you. For example, a 0% balance transfer card with an offer of 0% for up to 3 years might be enough to pay off your other debts without paying any interest whereas loans don’t typically carry these types of offers.

How to use a Debt Consolidation Loan

If you think a debt consolidation loan might be right for you, the first thing to do is to know where you are financially. Make a list of your debts, the interest rates on each, what you currently repay each month and the type of debt they are (credit card, etc.). Once done, add up the amounts to work out the size of the loan you would need to apply for to pay them off. Make sure that any loan you consider can adequately cover your current debts. For example, if it’ll only cover some of your lower interest debts and leaves your higher-interest rate balances as they were, then it may not be the right option to take. If you’d prefer, you can use ilumoni to help you get an overview of your debts in this way. 

It’s important to know that you don’t necessarily have to apply for a ‘debt consolidation’ loan to use the debt consolidation loan method of paying down debt. Essentially, it is just a personal loan but taken out for a specific reason. As such, you should shop around to find the best deal rather than looking only at providers offering debt consolidation loans. Remember, the goal here is to put you in a better position financially, so if your debts have interest rates of around 35%, but you take out a new loan with an APR of 41%, you’ll end up paying significantly more on your debt overall. Keep in mind any setup fees or additional costs too when browsing for loans, and factor those in when working out the overall cost. 

You may also be able to consolidate your debts in different ways, such as by transferring all of your credit card debt onto a single card with a lower or even 0% interest rate (balance transfer), though you should always check what the full interest rate will be after the offer ends, or if you break the terms and lose the promotional rate in the case of 0% (or similar) offers. Again, you could use the ilumoni app to explore whether this option is available to you, but the key takeout here is that it’s important to know what your options are and how much they will cost you both in monthly repayments and over the long term before you make your decision.

If you decide a consolidation loan is right for you, then it’s also really important that you are disciplined about your borrowing going forward. Taking out a debt consolidation loan and then continuing to spend on the other accounts will put you in a worse position financially as you’ll have even more to pay off and may find yourself with borrowing that you can no longer manage. Cutting up your credit cards and deleting saved card information online will help you to avoid temptation, and you could also consider closing any accounts that you no longer intend to use.

Debt Consolidation Pros and Cons


  • Outgoings are simplified and easier to keep track of with a single monthly repayment

  • Consolidating high-interest debts into a loan with a lower interest rate could save you money

  • Payments are set at a consistent amount, making it easier to budget and manage your finances


  • There may be fees for taking out the loan, or paying it back earlier than planned which should be factored into your decision

  • A loan could cost you more in the long run if you need to pay it back over a longer period, depending on the interest rates involved

  • Unlike credit cards, the repayment amount is fixed meaning you aren’t able to pay the minimum repayment if you aren’t able to afford it that month

How to get and apply for a Debt Consolidation Loan

Where to get a Debt Consolidation Loan

As a general rule, companies promising that a loan application won’t affect your credit score or that you’re guaranteed to be approved should be avoided. Similarly, beware of “government debt consolidation” as there is no such thing as a government-backed debt consolidation loan. There are government introduced debt solutions, such as DROs (Debt Relief Orders), IVAs (Independent Voluntary Arrangements), bankruptcy or debt arrangement schemes, but these are all formal debt management solutions, rather than consolidation loans. They often attract large fees and typically, significant consequences, so should be considered very carefully and with impartial advice from Money Helper, StepChange or similar to guide you. While the regulators watch out for misleading advertising, many still slip through the net. 

You can use online comparison sites to browse different loans or you can also use the ilumoni app (if eligible). If you’re unsure whether a provider is reputable, you can also check to see whether they’re authorised and regulated by the FCA by searching for them on the FCA’s register.

Who can get a debt consolidation loan?

As with all credit, the rates and amount you are offered by a lender will depend on your credit history, income or affordability and other aspects of your financial circumstances. For example, the better your credit score, the more likely you are to be offered a loan with a better interest rate. To find out more about your credit score and how it’s used, you can read our guide to credit scores.

If you’re finding it difficult to get offers from lenders and are wondering why it’s so hard to get a debt consolidation loan, it may be because your affordability is low or your debt to income ratio is already too high. 

If you’re unemployed, retired or have previously entered into an IVA or other formal debt solution arrangements, you may be less likely to be accepted for a new loan, and/or may be offered products with higher interest rates and at lower amounts than you apply for. An eligibility checker is a good way to explore your options without performing any ‘hard searches’ but bear in mind that there are no guarantees for being accepted until you apply formally, and final terms are always at the lender’s discretion. 

What to do when you can’t get a debt consolidation loan

It can be tricky to get a debt consolidation loan with bad credit, or if your income isn’t quite high enough to manage the repayments, so what can you do if you can’t get a debt consolidation loan?

Balance transfers

You could restructure your existing debts using balance transfers. This essentially means moving debt from one place to another and onto the account with the lowest associated interest rate where you have available space to do so within your credit limit. Alternatively, if you have any accounts with promotional rates, such as 0% on balance transfers for a set amount of time, it’s a good idea to move other balances there to reduce the cost of your debt overall. There are often fees involved though so be sure to account for those and always make sure you know what the interest rate will be when the promotional rate ends, or if you break terms and lose that offer. Our restructure nudge could also show you whether a balance transfer could save you money, based on the information you share with the ilumoni app. 

Switch your spending

If you don’t have balance transfers available to you and you still need to use credit, a good way to ensure you pay the least amount of interest possible on any new debt is to use your lowest interest product to spend on. For instance, if you regularly use a credit card with a 25% APR but have another with an interest rate of 21%, you should consider using the latter for your spending instead. 

Seek formal debt advice

It can be frustrating and often very stressful if you feel out of options and aren’t sure what to do about debt. At this point, contacting a reputable debt advice service can be helpful as they’re able to support you with personal payment plans and schemes such as ‘Breathing Space’, which is when lenders are obliged to give you a 2 month payment break, without your balances accruing further interest. In this period, a debt advisor can look through your circumstances in more detail and negotiate with lenders on your behalf. At ilumoni, we’d always recommend using free services like StepChange, Money Helper or Citizens Advice and avoiding any companies which charge you for their services or promote certain products before looking at your situation in detail. You can find a list of reputable organisations on our Debt Helplines page

Let ilumoni do the hard work for you

The ilumoni app lets you know what your debt is costing you, and when there’s room for improvement or money to be saved. Its ‘nudges’ are personalised, actionable insights designed to help you easily make affordable changes and informed choices, then get right back to living your life. Find out more about our nudges, including the consolidation loan nudge, in our guide to the app or download ilumoni now to take control of your borrowing.

Repaying your debt consolidation loan

Unlike with credit cards, where the minimum amount payable can change depending on your balance, paying back a loan is generally much simpler. When you first take out the loan, you’ll agree to a monthly repayment amount that is fixed and includes any interest payable, as well as an overall repayment period, such as 2 years or 48 months. 

Some lenders may charge fees for early repayment of a loan so be sure to check the details of the agreement before you commit. 

Budgeting for repayments

Before taking out a new loan, you need to be sure that you can afford the repayments right through until it is paid up. Any missed payments and arrears on your consolidation loan will be recorded on your credit history so don’t rely on future potential windfalls and be realistic about what you can pay.

If you’re worried that you can’t afford, or may struggle to afford in the future, the monthly repayments on a consolidation loan then it could be worthwhile talking to a debt advisor to get some advice on your options.

Can you refinance a debt consolidation loan?

Technically, it is possible in certain circumstances to take out a loan to repay a debt consolidation loan. However, early repayment fees could significantly eat into any savings made by doing so. If you’re looking to refinance your loan because you’ve found a better deal, be sure to consider all the potential costs and savings to see if it’s worth it, and bear in mind that your credit score may be affected if you appear to be managing your existing debt poorly. 

If, however, you’re looking to refinance your loan because you can no longer afford the repayments, it could be worth speaking to a debt advisor before you do so. Our debt helplines page has the details of a number of free, formal debt advice services that may be able to support you in finding a better solution for managing your debt moving forwards. 


Do debt consolidation loans work?

If managed properly and suitably budgeted for, debt consolidation can be a great tool for better debt management. However, it’s really important to stop spending on the other accounts you’ve chosen to consolidate wherever possible to avoid racking up even more debt than when you started. 

Do banks do debt consolidation loans?

Yes, banks do offer debt consolidation loans but be sure to shop around and consider any other providers too, as you may find a better deal elsewhere.

What is the best debt consolidation loan?

Ideally, the best debt consolidation loan would be the one that has the lowest interest rate, no fees for early repayment and is from a reputable lender authorised by the FCA. The ‘best’ is subjective though. For example, what suits someone else may involve a longer repayment period than you need (and remember, the longer it takes to pay back, the higher the overall interest costs) so be sure to prioritise the aspects that are most important for you. 

Will a debt consolidation loan hurt my credit score?

Taking out a loan, or any other form of regulated credit, won’t ‘hurt’ your credit score, whereas missing payments on any bills or debts will have a negative impact. Where your credit score may begin to be affected is when your overall debt to income ratio is high and your debt appears to be unmanageable. Similarly, applying for lots of new credit products in a short period of time can be an indication to lenders that you’re in a difficult position financially, and therefore may not be a ‘safe bet’ for new credit. You can find out more about your credit score and how it’s used in our credit score guide

Will I be approved for a debt consolidation loan?

Until you actually apply with the lender, there are no guarantees that you will be approved for a loan at a specific rate or for a specific amount. Eligibility checkers can give you an indication of whether you’re likely to be approved (and you can check your eligibility in the ilumoni app too if you receive a consolidation loan nudge), however, the final decision rests with the lender.

What is the interest rate for debt consolidation loans?

Interest rates vary for debt consolidation loans and there is no set rate, just like with credit cards. Before applying for one, be sure to work out whether a consolidation loan will save you money (if that’s your priority) by checking the interest rates on your existing debts. 

Can you pay off a loan with a credit card?

You can’t make loan repayments using a credit card, however, you could use a money transfer or balance transfer card to pay off a portion (or all) of the loan, depending on the balances available. If you find yourself needing to do this, however, it may be time to consider speaking to a debt advisor to discuss any other options available to you, so you can look to repay the debt and avoid simply moving it between products. You can find a list of debt advice services on our debt helplines page

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