Debt Consolidation Calculator
Compare your current debts with a potential consolidation loan
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What Is Debt Consolidation?
Debt consolidation involves taking out a new loan to pay off multiple existing debts. Instead of managing several monthly payments to different creditors, you make a single payment to one lender. This can simplify your finances and potentially reduce your monthly outgoings.
The process typically works by calculating the total amount you owe across all your debts, then applying for a consolidation loan for that amount. If approved, you use the loan to settle all your existing debts, leaving you with just one monthly repayment to manage.
Types of Debt You Can Consolidate
Debt consolidation can be suitable for various types of unsecured debt:
- Credit card balances, which often carry high interest rates
- Personal loans from banks or other lenders
- Overdrafts that have become persistent
- Store card balances with high APRs
- Payday loans or other short-term credit
Benefits of Consolidating Your Debts
Simplified Monthly Payments
Rather than tracking multiple payment dates and amounts, you have one fixed monthly payment. This makes budgeting more straightforward and reduces the risk of missing a payment, which could harm your credit score.
Potentially Lower Interest Rates
If you qualify for a consolidation loan with a lower interest rate than your current debts, you could save money on interest charges. Credit cards, in particular, often have rates above 20%, whilst consolidation loans may offer significantly lower rates.
Fixed Repayment Period
Consolidation loans typically have a fixed term, giving you a clear end date for becoming debt-free. This differs from credit cards, where making only minimum payments could mean years of debt.
Improved Credit Score
By paying off multiple debts and maintaining regular payments on your consolidation loan, you may see improvements to your credit score over time. However, this depends on responsible management of the new loan.
Important Considerations
Total Cost Over Time
Whilst monthly payments might be lower, extending the repayment period means you could pay more in total interest over the life of the loan. Always compare the total amount repayable, not just the monthly figure.
Secured vs Unsecured Loans
Unsecured consolidation loans do not require collateral, but typically have higher interest rates. Secured loans, backed by your property, may offer lower rates but put your home at risk if you cannot keep up with repayments.
Fees and Charges
Some consolidation loans include arrangement fees, early repayment charges, or broker fees. Factor these into your calculations to determine the true cost.
Credit Score Impact
Applying for new credit results in a hard search on your credit file, which may temporarily affect your score. Additionally, closing old credit accounts after consolidation can impact your credit utilisation ratio.
Important: Debt consolidation is not suitable for everyone. If you are struggling with debt, free debt advice services can help you explore all available options, including debt management plans and other solutions that may be more appropriate for your circumstances.
How to Get the Most from Debt Consolidation
Compare Multiple Offers
Different lenders offer varying rates and terms. Use eligibility checkers that perform soft searches to compare options without affecting your credit score.
Avoid Taking On New Debt
After consolidating, resist the temptation to use freed-up credit cards or overdrafts. This could leave you with both the consolidation loan and new debts to manage.
Consider Overpayments
If your loan allows penalty-free overpayments, paying extra when possible can reduce the total interest paid and clear your debt faster.
Create a Realistic Budget
Work out your monthly income and essential expenses to confirm you can afford the consolidation loan repayments comfortably, with some margin for unexpected costs.
Frequently Asked Questions
Can I get a debt consolidation loan with bad credit?
It is possible to obtain a consolidation loan with poor credit, though you may face higher interest rates and more limited options. Some lenders specialise in loans for those with adverse credit histories. Secured loans may be more accessible but carry the risk of losing your property if you default.
Will consolidating my debts affect my credit score?
Initially, applying for a consolidation loan may cause a small, temporary decrease in your credit score due to the hard credit check. However, successfully managing the loan and reducing your overall debt can improve your score over time. Closing old accounts may also affect your credit utilisation ratio.
How much can I borrow for debt consolidation?
Loan amounts vary by lender and your individual circumstances. Unsecured personal loans typically range from £1,000 to £25,000, whilst secured loans can offer higher amounts. The amount you can borrow depends on your income, credit history, and affordability assessments.
Should I consolidate my debts or use a balance transfer credit card?
Balance transfer cards offering 0% interest periods can be cost-effective if you can pay off the balance before the promotional rate ends. However, they typically have transfer fees and require good credit for approval. Consolidation loans provide a fixed repayment structure and may be better for larger debts or those who prefer certainty.
What happens if I miss a payment on my consolidation loan?
Missing payments can result in late payment fees, damage to your credit score, and potential default charges. If you are struggling to make payments, contact your lender immediately. They may be able to arrange a payment plan or offer temporary relief. For secured loans, persistent non-payment could ultimately result in repossession.
Can I pay off my consolidation loan early?
Many lenders allow early repayment, though some charge early settlement fees. Check your loan agreement for specific terms. Paying off your loan early can save on interest, but ensure any early repayment charges do not outweigh the savings.
Is debt consolidation the same as a debt management plan?
No, they are different approaches. Debt consolidation involves taking out a new loan to pay off existing debts. A debt management plan (DMP) is an informal arrangement where a debt charity or company negotiates with your creditors to accept reduced payments. DMPs do not involve new borrowing but may affect your credit file.
How long does it take to get approved for a consolidation loan?
Application timescales vary by lender. Some online lenders provide instant decisions and can transfer funds within 24 hours. Traditional banks may take several days to process applications. Secured loans typically take longer due to property valuations and additional checks.