Debt consolidation is where you take out one new line of credit to pay off other debts. Depending on your personal circumstances, it could be a good way to reduce interest and the size of your monthly repayments. Always seek financial advice if you are unsure whether a financial product is right for you.
Debt consolidation loans are loans to pay off debt. In most cases they are treated as a personal loan, which means they aren’t secured against your home or any other assets.
If you owe money to several different lenders, a debt consolidation loan from a new lender could help you streamline your payments. The idea is that you use the money from your new loan to pay off all existing debts. You’ll then have just one monthly payment to keep up with, ideally with a lower interest rate than what you were paying previously.
Debt consolidation is different to debt management, which is where you negotiate affordable repayments with your lender (often with the help of a debt management plan provider).
You could consider a debt consolidation loan if:
If all of these don’t apply to you, a debt consolidation loan may not be right for you. Always seek financial advice if you're not sure.
If you have a poor credit rating, you may not be eligible for certain debt consolidation loans.
In some instances, the lender will give you the loan but will charge a much higher rate of interest. In other instances, the lender may only be willing to offer a secured loan, which means your assets may be repossessed if you don’t keep up with payments.
Your existing debt may come with small print about “early repayment”. Lenders will often charge a fee if borrowers repay their debt before the agreed repayment period ends. This is because the lender will be losing out on any interest that would have accrued during that time.
Before you commit to a debt consolidation loan, make sure you check the agreements you have with your current lenders. It may be that the cost of early repayment fees is too high to make debt consolidation worthwhile.
If you want to consolidate debts efficiently you could look for a loan that has a lower interest rate than your existing credit agreements.
When you apply for your loan, choose a repayment plan that offers affordable monthly payments but won’t have you tied down for years and years. Remember the longer the loan term, the more interest you will pay.
Before making the commitment to a new loan, do the following:
Once you’ve taken out your loan, you should try to avoid borrowing more money from new lenders, as this will take away all the benefits of consolidating your debt.
The content on this page aims to offer an informative introduction to the subject matter but does not constitute expert financial advice specific to your own situation. All facts and figures were correct at time of publication and were compiled using a range of sources.