This guide is here to discuss everything you need to know about personal loans for consolidating debt. Before you apply for a debt consolidation loan, you’re going to need to hear this first. 

We’ve addressed some of the most common concerts and questions by people thinking of using this debt strategy. 

What does debt consolidation mean?

Debt consolidation is when you move all of your debt into one place. To do this, you need to take out credit and use this new money to pay off all of your other debts – or as many as possible. 

This means you’ll now have a single debt but it will be much bigger (equal value to all the debts you paid off). 

Debt consolidation can be achieved using different products and methods, but the most common method is using a debt consolidation loan. This new loan is then used to clear existing debts and only have to pay one monthly payment afterwards. 

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What is a debt consolidation loan?

A debt consolidation loan is a type of loan offered by banks, building societies and online loan providers. The loan is specifically used for consolidating debts and you may need to supply proof that this is your intention upon application, but that is not so common. 

Having a loan that is used for a specific purpose is not unusual, after all, we can get car loans or home improvement loans too. 

Whenever you apply for an unsecured debt consolidation loan, make sure you only apply to a lender that is authorised and regulated by the Financial Conduct Authority. 

Generic personal loan Vs debt consolidation loans

You may be able to use a generic personal loan to consolidate debts. Before applying for personal loans with this purpose in mind, always check that this is allowed within any terms and conditions. It’s unlikely that it won’t be allowed. 

Some high-street banks don’t advertise debt consolidation loans but do offer personal loans that can be used to consolidate debts, such as Santander UK. We’ll discuss some of the personal loans for consolidating debt later in this guide. 

How debt consolidation loans work

Debt consolidation loans work in an identical way as personal loans. You can search and compare these loans online using the representative APR (explained below!) and possibly loan calculators. You’ll need to check that you meet the eligibility criteria, which is typically being of age and a UK resident with a certain level of income. 

After you apply, the lender will check your individual circumstances and your credit score. You’ll get a decision quickly and could even have the funds deposited into your bank account within the same day. 

What is an APR representative example?

APR stands for Annual Percentage Rate, which is the cost as a percentage if you want to borrow for one year. It usually refers to interest rates, but it can include associated fees and charges for borrowing. 

The representative APR is the rate that was offered to 51% of loan applicants. It is used as a way to fairly advertise personal loans in the UK, including debt consolidation loans. This representative figure is also a good guideline if you need to compare loans – and compare against existing debts, as you would before consolidating. 

However, you must remember that 49% of loan applicants will have not received this p.a fixed representative example. The interest you pay could be different from what a loan calculator tells you. Some lenders publish a maximum APR rate so you know what the worst offer you can possibly receive before applying for the loan. 

Debt consolidation loans: The pros and cons

There are benefits and potential pitfalls from choosing to get a debt consolidation loan. Most of the time, these pros and cons are sensitive to individual circumstances. Some of them may not apply to you.

Pros of a personal loan for debt consolidation 

  1. The new loan will make it easier to manage your personal finances and monthly budget. Instead of having to plan for multiple repayments to many creditors, you will only have to pay a single monthly payment (or fewer monthly repayments if you don’t consolidate all debts).
  2. If the rate of interest on the new loan is lower than the interest rate you were paying across your existing borrowing, you could save money. Your new monthly repayment will include less interest than the total amount of interest you were previously paying.
  3. The two pros above could contribute to you getting out of all debt faster, and they could help protect your credit score. 
  4. An unsecured debt consolidation loan is able to consolidate multiple types of debt, whereas other consolidation methods – i.e., a balance transfer credit card – can only be used to consolidate credit card debt. 

Cons of a personal loan for debt consolidation

  1. Approval for debt consolidation loans depends on the loan amount and your income, but also your credit score. If you have a lot of credit elsewhere and arrears, it can be difficult for the people that need these loans the most to be approved. And if they are approved, the interest rate offered may be too high to make them worth it. 
  2. If you miss your new loan monthly repayment or cannot repay in full, your debt situation could worsen fast and you could be taken to court.
  3. Debt consolidation loans might provide a good solution, but they do not solve any issues that caused debt to accumulate in the first place. This may make it just as hard to pay back this single loan as well. 

Is it a good idea to get a personal loan for debt consolidation?

Now that you know what a personal debt consolidation loan really is, you’re probably asking yourself if it is a good idea? The answer is yes – if you can access the full loan amount you need at the right interest rate. If not then there are alternative options discussed at the end of this guide.

Even if you can get a debt consolidation loan that ticks all your boxes, it is preferable to speak with a debt charity first. Their confidential advisors will assess your finances and might suggest a more advantageous debt mitigation strategy, even a solution that can write off some debt

How to get a personal loan for debt consolidation

To get a debt consolidation loan you should search all the regulated lenders. This means searching for these products with banks, financial institutions and even reputable online lenders. 

You must apply truthfully and your credit score will be checked. The lender will usually make a decision within a day or two, if not instantly. 

Compare personal loans for debt consolidating 

To give you an example of what’s on the market, we’ve rounded up some for the current lenders and their debt consolidation loans, including APR representative interest rates. 

These aren’t always the best on the market, but we’ve mixed up banks and online creditors to give you a good idea of what’s out there. Use it as a reference point if you’re new to these loans. 

  1. Tesco

If you would like to borrow from one of the UK’s favourite supermarkets – you can. Tesco offer debt consolidation loans up to a loan amount of £15,000 with an APR representative rate of 2.9%

  1. 118 118 Money

118 118 Money is an online lender offering debt consolidation loans to UK residents. They currently lend between £1,000 and £5,000 for a maximum period of three years and an APR representative rate of 49.9%. 

  1. Santander

The UK arm for the biggest Spanish bank offers personal loans that can be used to consolidate debts with an APR representative rate of 3%. You can borrow as much as £10,000 with this loan product. 

  1. The Post Office

The Royal Post Office also offers loans on the UK market, including a debt consolidation loan up to £25,000 repayable over as long as five years. The APR representative rate on this loan is 8.3%.

  1. Barclays

Barclays have a debt consolidation loan with a current APR representative rate of 7.9%. This product is available to people who want to borrow between £7,500 and £25,000. 

  1. Lending Works

Lending Works is an online lender offering these loans advertised with an APR representative rate of 12.9%. Lending Works also promise to put the funds in your bank account within 48 hours of approval. 

  1. Virgin Money

Virgin Money does operate physical branches in some UK towns and cities. You can go into one of these locations or apply for their consolidation loan online. The current APR representative rate is 2.9% over a period of five years to a maximum value of £15,000. 

  1. JN Bank

JN Bank is a Jamaican bank with a presence in London. They offer loans to consolidate debt up to £15,000 to be repaid over a maximum of five years. At the time of writing, the APR representative rate is 11.9%. 

Debt consolidation loans and bad credit

If you have bad credit and are worried that you won’t be able to access a debt consolidation loan, you’ll be pleased to hear that there are still lenders that will give you one of these loans. 

Most lenders willing to do so operate exclusively online, rather than high-street banks. Be cautious of the companies you apply for a loan to. The loan could have a significantly higher interest rate and repayments could include fees. 

It is a wise decision to try and improve your credit score first. The best way to do this is to manage your finances well and pay debts on time. 

If you want a quick way to improve your bad credit rating, consider adding your name to the local electorate register and search your credit file for errors that can be removed. 

Does a personal loan for debt consolidation affect your credit score?

Applying for a debt consolidation loan will not affect your credit score unless you apply erratically to lots of lenders in quick succession. When you make an application, the lender conducts a hard credit check of your file. This leaves a mark but doesn’t have a negative effect in isolation.

The only way a debt consolidation loan would negatively affect your credit score is if you failed to keep up with your fixed monthly repayments. 

Other ways to consolidate debts

A debt consolidation loan is one way of consolidating existing debts, but there are three others, namely:

  1. Balance transfer credit cards (for credit card debts only)
  2. Remortgaging to pay off debts 
  3. Debt Management Plans

Bad credit? Consider a DMP!

If you have been unable to get a debt consolidation loan due to bad credit history, you could still consolidate without officially consolidating by using a Debt Management Plan. In a nutshell, a DMP is an agreement with multiple creditors for you to make one payment which is proportionally split between them. You don’t technically consolidate, but you do start making single monthly repayments that are easier to manage. 

A DMP can be used to pay off credit cards, store cards, loans and lots of other types of debt. Read more here!

Do this before making a decision!

Debt consolidation can make you feel nervous and worried – and that’s completely understandable. Most of the time people are anxious because they are not 100% sure that a debt consolidation loan is the right decision. 

If this rings a bell with you, it’s time to pick up the phone or jump online to speak with the UK’s exceptional debt charities. Their knowledgeable team will assess your situation and make a recommendation based on your situation exactly. This gives you the confidence to proceed with debt consolidation or explore an even better option.

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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