How does Debt Consolidation Work? In-depth Guide 2022

Debt Consolidation
How does debt consolidation work

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How does debt consolidation work? This is the question – and related questions – we’ll be addressing here. Everything you need to know about debt consolidation, it’s benefits and who should consider it is at your fingertips. Whether you have credit card debt or owe loan companies, the solution could be right here!

How does debt consolidation work?

Debt consolidation is when someone with multiple sources of credit – such as personal loans and credit cards – pays off all of their debts by taking out one new form of credit, typically a debt consolidation loan. For example, you may currently have two personal loans and a credit card owing a total of £750. To consolidate your debt you would take out a personal loan to pay off the other loans and the credit card, leaving you with one debt and one monthly repayment. 

By using one new loan to clear all existing debts, you are consolidating your debt and making repayments easier to manage through one monthly payment. Making a single payment every month could help debtors keep track of their finances, prevent missed payments and reduce ongoing stress. 

Consolidating debts may also enable you to pay a lower rate of interest and reduce ongoing fees. Personal loan companies may offer a lower rate if you’re taking out a bigger loan which may be required to consolidate multiple debts – but not always. If your cumulative interest was higher than the rate you pay within your new monthly payment, you’re saving money by consolidating debts. This is the main motivating reason why debtors choose to consolidate.  

There are different types of debt consolidation, and we discuss two of the most common further below.  

The pros and cons of debt consolidation

The benefits of debt consolidation are:

  1. It makes budgeting for your debts easier and less stressful
  2. It reduces the chance of missed payments and additional fees
  3. It mitigates potential credit score damage
  4. You may be able to take advantage of loans with better interest rates
  5. Thus, you could be able to reduce your monthly payments and save money

The cons of debt consolidation are:

  1. You may have to pay higher interest or pay back for longer
  2. It involves taking on another credit application and another credit history check
  3. The process can be confusing (that’s why we’re here to help!)
  4. You might have to pay additional fees when you consolidate debt

Overall, debt consolidation is a good idea for some, but it’s not always the correct answer. You may want to consider alternative debt solutions as well. 

How does debt consolidation work for loans?

Debt consolidation for loans usually works in the same way as described above. The debtor will take out a loan to repay all of their other loans. To make it worthwhile the new loan they take out should have better repayment terms, i.e. interest rate, than the cumulative rate they are currently paying. 

Remember that taking out a loan will require approval and a credit check from the loan provider, meaning existing debts could stop you from getting the loan. However, to navigate this potential issue, you can take out loans specifically for the purpose of debt consolidation, aptly named debt consolidation loans. 

What is an unsecured debt consolidation loan?

An unsecured debt consolidation loan is a type of loan that is taken out for the specific purpose to consolidate debt. Taking out a loan for a specific purpose is not uncommon, after all, you can get car loans and home loans too. Debt consolidation loans are unsecured against your assets, as opposed to a secured loan like a mortgage that uses the property as collateral in the case of defaults. 

You may be able to still get these loans when you have poor credit. 

Where to search debt consolidation loans?

Scores of financial institutions like banks and building societies offer debt consolidation loans. You can also browse different consolidation loan options, including repayment terms, APR and more online. Online lenders usually offer an online calculator so you can easily work out what your new monthly payments will be. Always consider other loan payments you may be subject to before deciding. 

And before you apply, make sure to check your credit score for any mistakes that could cause your application to be rejected

You should avoid scammers and loan sharks and only take out a loan from a lender that is authorised and regulated by the financial conduct authority. 

How does debt consolidation work for credit cards?

You can use a debt consolidation loan to also pay off credit card debts, or a combination of loans and credit cards. This works in exactly the same way as explained above. But there is another way to consolidate debt if you’re only wanting to consolidate your credit card debts, namely a balance transfer. 


What is a credit card balance transfer?

A credit card balance transfer is when you take out a new credit card to pay off all your existing cards. Thus, you switch the outstanding balance from multiple cards to the new card. The balance transfer card is similar to a debt consolidation loan because it is used for this specific purpose. Note, some cards will not allow you to do this and those that do will include balance transfer fees. 

We’ve put together an easy guide to help you understand how to consolidate credit cards. You may want to get free debt advice from a charity like StepChange before making a decision or for support in understanding your options. This advice is advised if you owe money in general. 

How long does debt consolidation take?

The process of consolidation can take anywhere between a couple of days to weeks. The initial stage of taking out a new loan or credit card is usually quick, as long as your credit score is good enough for approval.

What are the risks of debt consolidation?

The biggest risk of consolidating your debts is not being able to keep up with your new larger monthly repayments. You may get into unforeseen financial difficulty and not be able to repay what you owe. If this has happened to you, speak with the loan company directly and consider other debt management options. 

Another risk is that you do not read the terms and conditions of any new loan you commit to and the low interest is not worth it because of other potential fees and charges you didn’t properly understand. 

How does debt consolidation affect credit scores?

When you use a consolidation loan correctly and effectively, it will not harm your score. In fact, it will remove the chances of missing further payments, and in hindsight, safeguard your credit history. 

But be aware that applying for one of these loans, or any loan for that matter, will leave a search mark on your file. Multiple of these marks left by irrational scattergun loan applications is bad and can cause credit score damage. 

Recap – How does debt consolidation work?

Let’s recap! So, consolidating debt is an effective debt management strategy that moves multiple debts into one new debt. This can make it easier to plan for repayments and prevent the debt from increasing. And it can make repayments cheaper if you manage to find a loan with a lower interest rate than the cumulative interest rates you are currently paying. 

Get debt advice first!

You should always seek debt advice before choosing this debt management option. Free UK charities can offer unrivalled support. Some of the best nationwide options are:

  1. National Debtline
  2. Step Change UK
  3. Christians Against Poverty

Local debt advice groups can also offer excellent help.


Are you struggling with debt?
Are you struggling with debt?
  • Affordable repayments
  • Reduce pressure from people you owe
  • Stop interest and charges from soaring