What is the interest rate on a debt consolidation loan? We’ve done the research for you to give you an idea of what interest rates you’ll have to pay if you decide to take out a debt consolidation loan. 

We explain everything you need to know about interest rates, right here!

What is debt consolidation?

Debt consolidation is when someone with debts takes out more credit to pay off two or more of their debts. They consolidate their debt by paying off multiple debts with one new debt. The purpose of this is to make budgeting and managing debts easier, but also to reduce the interest paid on the total debt. 

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What is a debt consolidation loan?

There are various methods of consolidating debt, and one of the most used is a debt consolidation loan. This is a special type of unsecured personal loan where the credit is specifically used to pay off other debts. 

Other methods of debt consolidation are:

  1. Balance transfer credit cards that are used to exclusively pay off credit card debt
  2. Remortgaging and second charge loans to release home equity which is then used to pay off debts
  3. Debt Management Plans (DMPs) as an informal debt solution that agrees to one fixed monthly payment that is split between multiple creditors. 

How do debt consolidation loans work?

Debt consolidation loans are like other unsecured personal loans. You apply for the loan, usually online, and if approved you receive the money in your bank account within a day or two. As the loan is given to pay off debts, you must use the finances for this purpose only. 

The loan you receive will be subject to an interest rate. A debt consolidation loan will not be worthwhile if the interest rate is higher than the total amount of interest you are currently paying across all debts you wish to consolidate. When you search for debt consolidation loans, you will notice that they are advertised with a representative APR interest rate.

Representative APR explained

Representative APR is a way for banks and loan providers to market their personal loans accurately and help you compare debt consolidation products across the market. 

The representative APR example is an interest rate that the average person receives when getting approved for that particular loan. In fact, the representative example means that 51% of loan applicants received this interest rate or better. 

But remember, the representative APR example is subject to the loan amount you apply for, your credit history and your personal finances. The APR rate you are offered could be better or worse than the representative example. A maximum APR may also be stated to give you some peace of mind before applying. 

Debt consolidation loan interest rates

When searching for a debt consolidation loan, you can only use the representative example to determine how much interest you will have to repay. At the time of writing, debt consolidation loan interest rates vary widely between 2.9% APR and 59.7% APR.

If you have a poor credit score, you should expect that the rate you’re offered to be not as appealing as the representative APR example. On the contrary, if you have an excellent credit score, you might be offered a lower rate than advertised. 

Do debt consolidation loans typically work?

If you take out a debt consolidation loan and stick to the fixed monthly repayments, there is no reason why they cannot work. 

If you miss monthly payments or do not pay in full, your debt situation will become worse and you could even be taken to court. This is why it’s essential that you only choose an affordable personal loan and your chosen lender makes sure you can afford to repay comfortably by checking your finances and credit history. 

What are the best consolidation loans?

Debt consolidation loans with the lowest interest rates are currently offered by the big banks and high-street lenders. This doesn’t necessarily make them the best, but it would make them among the cheapest. 

Here are some of the debt consolidation loans with the lowest APR examples right now:

  1. Santander – 3%
  2. HSBC – 3.3%
  3. Royal Bank of Scotland – 3.4%
  4. NatWest – 3,4%
  5. Halifax – 3.5%
  6. Lloyds Bank – 3.9%

However, there are still some equally good or lower rates available elsewhere online. For example, Tesco and Virgin Money both advertise a debt consolidation loan with an APR of just 2.9%. Some online lenders are offering higher APR rates above 10%, and some even have rates between 40-60% APR.

Can I get a debt consolidation loan if I have bad credit?

You may still be approved for a debt consolidation loan if you have a poor credit score. However, the loan amount available to you and the interest rate offered may be significantly less appealing than some of the low rates mentioned above. If the interest rate is higher than you hoped, debt consolidation may not be a worthwhile debt mitigation strategy and you may want to consider alternative debt solutions. 

Is now a good time to get a debt consolidation loan?

Debt consolidation loan interest rates have remained the same for some time. It is only a good time to get a debt consolidation loan if the new loan will improve your situation, either by making it easier to budget and/or reducing the rate of interest you pay and subsequently lower monthly repayments. 

You should consider improving your credit score before making an application to improve your chances of approval. If you want to make an application soon, make sure you’re on the local electoral register and search your credit history for mistakes – and get them removed. These two tasks can instantly increase your score. 

Is debt consolidation right for you?

To learn if debt consolidation is the best option to mitigate your debts, why not speak with a debt advice charity? Free and confidential debt advice is easily accessible at charities like Step Change, Citizens Advice and National Debtline. 

And we have more guides all about this topic on MoneyNerd. Check them out now!

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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