MB
Mustafa Bilgic
Personal finance writer specialising in debt management, consolidation strategies, and UK consumer credit. Updated February 2026.
What Is Debt Consolidation?
Debt consolidation means taking out a single new loan to pay off multiple existing debts. Instead of managing several different creditors — each with different interest rates, payment dates, and minimum payments — you have one monthly payment at (ideally) a lower interest rate.
The primary goal is to reduce the total interest you pay over time, and/or reduce your monthly outgoings to make debt more manageable. Debt consolidation does not reduce the principal you owe — it simply restructures it.
When Debt Consolidation Makes Sense
Consolidation is most beneficial when:
- Your existing debts carry high interest rates (e.g. credit cards at 20–30%+ APR)
- You can qualify for a consolidation loan at a meaningfully lower APR
- You are not extending the repayment term so much that total interest increases
- You have the discipline not to accumulate new debt on cleared credit cards
- The simplicity of one payment genuinely helps you manage your finances
Real Example: 3 debts totalling £7,000 at 20–40% APR
Credit Card 1: £3,000 at 22.9%, minimum £75/month. Credit Card 2: £2,500 at 27.9%, minimum £65/month. Overdraft: £1,500 at 39.9%, minimum £50/month. Total monthly: £190. Estimated total interest at minimums: approximately £4,200 over many years. Consolidation loan: £7,000 at 9.9% APR over 36 months = £225/month. Total interest: approximately £1,108. Interest saving: approximately £3,100. Monthly cost is slightly higher (£225 vs £190) but term is fixed and total cost is dramatically lower.
When Consolidation Does NOT Make Sense
Debt consolidation is NOT a good idea if: the new loan APR is higher than your existing debts, you extend the term so long that total interest exceeds what you would have paid, you are using a secured loan to consolidate unsecured debts (putting your home at risk), or you have not addressed the spending habits that created the debt in the first place.
Alternatives to Debt Consolidation
0% Balance Transfer
Move credit card debt to a 0% card for 12–30 months. Transfer fee ~2–3%. Best option if you can clear the balance before the 0% period ends.
Debt Avalanche
Pay minimum on all debts, then put all extra money on the highest APR debt first. Mathematically optimal — reduces total interest paid the most.
Debt Snowball
Pay off smallest balances first regardless of interest rate. Psychologically motivating — creates momentum as debts are eliminated one by one.
Debt Management Plan
Free service from StepChange/National Debtline. Creditors may freeze interest. No new loan required. Best for those who cannot afford current minimums.
IVA
For serious debt (£10,000+). Formal insolvency, monthly payment for 5–6 years, remainder written off. Stays on credit file for 6 years.
Bankruptcy
Last resort. Debts above a threshold written off after 12 months. Serious long-term financial consequences. Take professional advice first.
Free UK Debt Advice Services
Before taking out any consolidation loan, consider speaking to a free, impartial debt adviser:
- StepChange Debt Charity: 0800 138 1111 | stepchange.org
- National Debtline: 0808 808 4000 | nationaldebtline.org
- Citizens Advice: citizensadvice.org.uk
- MoneyHelper: moneyhelper.org.uk (government-backed)
These services are completely free and do not charge fees. Be wary of commercial debt management companies that charge fees for services available free from charities.
Secured vs Unsecured Consolidation Loans
Most debt consolidation loans are unsecured personal loans. However, some lenders offer secured consolidation loans (also called homeowner loans or second-charge mortgages), which are secured against your property. These typically offer:
- Lower interest rates than unsecured loans
- Larger loan amounts
- Longer repayment terms
The significant downside: if you cannot keep up repayments, your home may be repossessed. Only consider a secured consolidation loan if you have exhausted all unsecured options and have taken independent financial advice. Converting unsecured debts to secured debt is a serious financial decision.
Frequently Asked Questions
Is debt consolidation a good idea in the UK?
Debt consolidation can be genuinely beneficial if you qualify for a consolidation loan at a lower APR than your existing debts and you do not extend the repayment term excessively. It simplifies payments and can significantly reduce total interest. However, it only works if you do not accumulate new debt after clearing your existing balances. The key test: does the consolidation reduce your total interest paid? Use this calculator to find out before you apply.
What is the risk of a secured debt consolidation loan?
A secured consolidation loan uses your home as collateral. If you miss payments, the lender can ultimately repossess your property. You are converting unsecured debt (where default means debt collection and credit damage) into secured debt (where default risks your home). This is a serious escalation. Only consider secured consolidation after exhausting all unsecured options and after taking independent financial advice from a regulated adviser or free debt charity.
What is a 0% balance transfer and how does it compare to consolidation?
A 0% balance transfer allows you to move existing credit card debt to a new card with 0% interest for a set promotional period (typically 12–30 months in the UK). If you can repay the full balance within this window, a balance transfer is usually cheaper than any consolidation loan. The main costs are a one-off transfer fee (usually 2–3% of the balance) and the risk that if you do not clear the debt before the promotional period ends, the rate reverts to a very high standard APR (often 20–25%).
Will debt consolidation affect my credit score?
Yes, in several ways. Applying for a consolidation loan creates a hard search, temporarily lowering your score. If approved and you clear existing debts, your credit utilisation ratio improves (less total debt relative to credit limits), which can boost your score. Making consistent on-time payments on the new loan further improves your score over time. Closing old credit card accounts after consolidation can temporarily lower your score by reducing your overall credit limit.
What is a Debt Management Plan (DMP)?
A Debt Management Plan is an informal arrangement where a debt charity (StepChange, National Debtline) negotiates with your creditors on your behalf. You make one reduced monthly payment to the charity, who distributes it to your creditors. Creditors often agree to freeze interest and charges. DMPs are free through charities, do not require a new loan, and do not involve formal insolvency. They typically take several years but are a much safer option than high-rate consolidation loans for people in genuine financial difficulty.
What is an IVA and when should I consider it?
An Individual Voluntary Arrangement is a formal insolvency solution for people with significant debt (typically £10,000 or more across at least two creditors). You agree to make reduced monthly payments for 5–6 years, after which remaining debt is legally written off. An IVA must be set up by a licensed Insolvency Practitioner. It stays on your credit file for 6 years and affects your ability to get credit, mortgages, and certain jobs. Only consider an IVA after taking free advice from StepChange or National Debtline — never pay an upfront fee to an IVA company.
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