Debt consolidation interest rates and costs
The interest rate is the headline cost of a consolidation loan, but it is not the whole story. This page explains how rates work, how they are advertised, and the other costs that decide what you actually pay.
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What does APR mean on a consolidation loan?
The annual percentage rate (APR) expresses the cost of borrowing as a yearly percentage. It includes the interest and certain compulsory fees, which makes it a fuller measure than the interest rate alone and a sound way to compare loans like for like. As a rule, a lower APR means cheaper borrowing, but only when the term is the same, because a longer term spreads the cost and increases the total interest you pay. Our guide to understanding APR goes into the detail.
Representative APR versus the rate you actually get
Advertised rates are usually described as "representative". Under UK rules, the representative APR must be offered to at least a set proportion of the people who are accepted. Your own rate could be higher, depending on how the lender assesses your application. The advertised figure is a guide, in other words, not a promise of the rate you personally will be offered.
Fixed or variable rate, which should you choose?
A fixed-rate loan keeps the same interest rate for the whole term, so your monthly repayment never changes. A variable rate can rise or fall, which makes budgeting less predictable. Many consolidation loans are fixed, and that steadiness is part of the appeal: it turns several shifting payments into one repayment you can plan around. Fixed does not automatically mean cheapest, though, so it is still worth comparing the total cost of a fixed deal against a variable one.
What affects the interest rate you are offered?
No two applicants are priced identically. A handful of factors move the rate a lender will put in front of you.
Your credit profile
A stronger credit history generally unlocks lower rates. See eligibility and credit score effects.
The amount and term
Rates often vary by loan size and length. The cheapest headline rates are frequently tied to particular amount bands.
Secured or unsecured
Secured loans may carry lower rates but put your home at risk; unsecured loans do not.
The lender
Different lenders price risk differently, so it pays to compare rather than take the first offer.
Can a consolidation loan beat the rate on your current debts?
Sometimes, but not always. The whole point of consolidating to save money is replacing higher-rate debts, such as store cards or an overdraft, with borrowing that costs less. Whether that works out depends on the rate you are actually offered and the term you choose. A loan at a lower rate can still cost more overall if you stretch it over far more years than your current debts would have taken to clear. The honest comparison is always your current debts against the new loan on the same timescale. Keeping the term short, having a stronger credit profile and comparing several lenders rather than taking the first offer all improve your odds of genuinely cutting the cost.
Why the total cost matters more than the monthly payment
Beyond interest, watch for arrangement or product fees on the new loan and early-repayment charges on the debts you are clearing. These can reduce, or wipe out, any saving from a lower rate. The figure that matters most is the total amount repayable over the life of the loan. You can see how rate, amount and term interact using the loan repayment calculator, and compare your current debts with a single loan in the comparison calculator.
A lower monthly payment is not the same as a lower total cost. Always compare the total you would repay, not just the amount due each month. Learn more in how to compare loans.
Common questions about consolidation loan rates
Why is my rate higher than the advertised APR?
The representative APR only has to be offered to a set proportion of accepted applicants. Your rate reflects the lender's view of your application, so it can be higher even when the headline figure looks attractive.
Does a longer term always cost more?
At the same rate, yes. Spreading a loan over more years lowers the monthly payment but raises the total interest, because you borrow the money for longer. Shortening the term where you can usually saves money overall.
Are there fees on top of the interest?
There can be. Watch for arrangement or product fees on the new loan and early-repayment charges on the debts you clear. Including these in your sums is the only way to see the true cost.
Can I get a 0% rate on a consolidation loan?
Standard consolidation loans charge interest. A 0% deal is more associated with balance transfer cards, which pause interest for an introductory period before reverting to a higher rate.
Does the loan amount change the rate?
Often, yes. Lenders frequently reserve their lowest headline rates for particular amount bands, so borrowing just above or below a threshold can change the rate you are offered. Borrow only what you need to clear your debts.
Should I fix my rate?
A fixed rate keeps your repayment steady, which helps budgeting, but it is not automatically the cheapest. Compare the total cost of a fixed deal with a variable one before deciding.
How do I compare two loans fairly?
Put them on the same term and compare the total amount repayable, including any fees, rather than the monthly payment alone. A lower monthly figure spread over a longer term can still cost more in the end.