How do Debt Consolidation Loans Work?

That increases your risk of missing an instalment, which can harm your credit score. By consolidating your debts, you can simplify your finances into one repayment plan.

But how do debt consolidation loans work? Our in-depth guide is here to explain all.

How does debt consolidation work? Key takeaways

What is a debt consolidation loan?

A debt consolidation loan is a form of borrowing that enables you to combine two or more existing debts into one repayment plan.

If you have multiple debts such as credit cards, store cards, overdrafts and personal loans, it can be hard to keep track of everything. A debt consolidation loan can allow you to pay off those debts, leaving you with the consolidation loan to repay.

That means you're only dealing with one lender, one repayment term and one interest rate. So, it can become much easier to manage your debt this way.

How do debt consolidation loans work?

Here's a simple step-by-step guide to help you:

Work out how much you need to borrow to pay off your existing debts.
Apply to a lender for that amount and define your preferred repayment term.
The lender will review your application, looking at things like the combined size of your existing debts, your income and credit history.
If your lender approves your application, they will either transfer the funds to you or pay your existing creditors directly, depending on the lender.
If the funds are paid to you, you use them to pay off your existing debts.
You repay the debt consolidation loan, usually via monthly instalments, over the period you agreed to when you applied.

How debt consolidation loans work: The interest

As with any loan, debt consolidation comes with interest attached. So, if you take out a debt consolidation loan, you'll end up repaying more than you borrowed in the first place.

But one of the main reasons people borrow this way is that it can give you access to a lower interest rate than you are being charged on your other debts. That means that as well as simplifying multiple payments into one, that new monthly instalment could be lower than the combined total of your previous payments.

“It's also important to remember, though, that you might repay your debt consolidation loan over a longer term. This can increase the amount of overall interest you repay. So, you need to carefully weigh up all of these factors before you apply, otherwise you could find yourself in more debt.”

An example of how a debt consolidation loan could work

Borrowing on things like credit cards and store cards can mean you're charged higher interest rates. Our tables below show how you could use a loan to consolidate three separate debts into one, at a better interest rate with lower monthly repayments.

Type of debt	Amount you owe	Interest rate	Monthly repayment	Time taken to pay off debt	Total interest payable	Total amount payable
Credit card	£1,500	24.9%	£100	18 months	£277	£1,777
Personal loan	£1,000	15.9%	£50	Two years	£156	£1,156
Store card	£500	30.9%	£50	One year	£74	£574
Total	£3,000	N/A	£200	Two years	£507	£3,507

Swipe or scroll across to see all columns.

And here's how those numbers compare against paying off a debt consolidation loan of £3,000, at an interest rate of 9.9%, over that same two-year period:

Comparison	Combined existing debts	Debt consolidation loan
Amount you owe	£3,000	£3,000
Monthly repayment	£200	£138
Time taken to pay off debt	Two years	Two years
Total interest payable	£507	£319
Total amount payable	£3,507	£3,319
Saving	N/A	£188

Swipe or scroll across to see all columns.

Please note that the numbers in the tables above are purely to illustrate how a debt consolidation loan could work in theory. The interest rate offered to you by lenders can vary based on a number of factors like your income and credit history.

How debt consolidation works: Secured vs unsecured loans

Secured debt consolidation loans

Find out more about secured loans

Unsecured debt consolidation loans

Find out more about unsecured loans

Is a debt consolidation loan right for me?

You need to think carefully and weigh up all your options before you can work out if a debt consolidation loan is going to be the most suitable choice for you. Use our comparison below to help you decide:

When debt consolidation could work for you	When debt consolidation might not work for you
You can secure a lower interest rate	It increases the total cost of your debt
You're struggling to juggle multiple repayments	Fees on the loan and early repayment charges on your existing debts make it more expensive
You want predictable monthly outgoings	You are already comfortably managing your existing debts
You have a clear plan to stay out of debt	You're unlikely to change your spending habits and are likely to build up more debt

Swipe or scroll across to see all columns.

For more detailed information and guidance on this topic, check out our article: What is debt consolidation and is it a good idea?

How can I get a debt consolidation loan?

If you think a will help you simplify and better manage your existing debts, you can apply with Norton Finance.

We're a broker, not a lender, which means we don't push our own products. Instead, we search the market to find a loan suited to you and your situation.

You can get a free quote, which won’t impact your credit score. And there’s no pressure to apply. You can also give us a call on 0800 694 5566 and we’ll be happy to see how we can help.

FAQs about debt consolidation loans and how they work

No. Taking out a debt consolidation loan does not wipe out all your debts. You can use it to pay off your existing debts, but then you will need to repay the new loan. Try to think of a debt consolidation loan as a new repayment plan, rather than as a way to instantly settle everything you owe.

Yes, it can do – as long as the new loan comes with a lower interest rate than your other lenders are charging you. This could mean that the overall cost of repaying your consolidation loan is lower than paying off all your existing debts individually.

Before you apply, work out how much your new monthly instalments will be and over what period of time, and compare those figures to your existing payments. Then you'll have a clear picture of whether a consolidation loan makes good financial sense for you.

Yes. But the effects can be positive as well as negative.

When you apply for a loan, your lender will do a hard credit check. This can temporarily lower your score by a few points. And if your application is successful, any missed repayments will show up on your file and also harm your score.

On the flip side of that, repaying your loan on time and in full each month shows lenders and credit reference agencies that you are a responsible borrower. Over time, this can help you improve your score.

Find out more in our detailed guide: Does debt consolidation affect your credit score?

Yes. Having bad credit doesn't mean that your chances of securing a loan are over. But your score is an important factor for lenders when they look at your application. So, if you do have poor credit or a short credit history, it might mean you have more limited options. Any loan that lenders do offer you might be for a lower amount or with a higher interest rate attached.

We can approve your application in principle within 24 hours. And all lenders are different, but most can transfer the funds to your account within 14 days.

We can help you find secured debt consolidation loans of up to £500,000 and unsecured loans up to £25,000. It's important that you borrow only what you need to pay off your existing debts. Otherwise, you could find yourself building up further debt unnecessarily.

We can help you find loans payable over anything from one to 30 years. But the repayment term you choose depends on what's best for your unique situation.

A shorter repayment term means you will pay off the loan faster and you'll pay less interest. But it also means your monthly instalments will be higher.

The opposite is true for a loan taken out over a longer term. Your monthly repayments will be more manageable, but the overall cost will be greater.