What is debt consolidation?

What does debt consolidation actually mean?

Debt consolidation means bringing several separate debts together into a single debt. Most people do this with a debt consolidation loan: you borrow enough to pay off everything you currently owe across different accounts, then repay that one new loan over a set period. From that point you have one lender, one interest rate, one monthly repayment and one end date.

The key word is combine. Consolidation does not reduce the amount you owe, and it does not write anything off. What it changes is the shape of your debt, giving you fewer accounts and a single payment. It can also change the cost, but only if the new loan carries a lower interest rate than the debts it replaces. Whether it works out cheaper overall comes down to the rate you are offered and how long you take to repay.

Why do people consolidate their debts?

There are usually two motives, and many people have both. The first is simplicity. Keeping track of several balances, each with its own payment date and minimum amount, is stressful and easy to get wrong. One payment on a fixed date is far harder to miss. The second is cost. Store cards, credit cards and overdrafts often carry high interest, so moving those balances onto a loan with a lower rate can reduce the interest you pay.

Neither benefit is a given. That is why it pays to read whether debt consolidation is a good idea for a situation like yours before you commit. A smaller monthly payment can quietly hide a larger total bill if you stretch the repayment over more years than you needed to.

How does debt consolidation work in practice?

The mechanics are straightforward. You apply to a lender for a loan equal to the total you owe. If you are approved, that money clears your existing debts, either paid to you so you can settle them yourself or paid directly to your old creditors. Your previous accounts are then repaid and closed, and you start repaying the single new loan. Our guide on how debt consolidation works covers each stage in more detail.

A worked example of consolidating three debts

Imagine someone owes money across three accounts. These figures are an illustrative example only. They are not a quote, a rate you can obtain, or a prediction of savings.

Here, three payments adding up to £200 a month could be replaced by a single consolidation loan of £6,000. Whether that one payment comes to more or less than £200 depends on the loan's interest rate and term. A shorter term means higher monthly payments but less interest overall; a longer term does the reverse. You can model different combinations with the loan repayment calculator, but always compare the total amount repayable, not just the monthly figure.

What kinds of debt can you consolidate?

Consolidation usually applies to unsecured debts, the sort that are not tied to an asset. Credit cards, store cards, overdrafts, catalogue accounts and personal loans are the most common candidates. Several of these together, each with its own rate and due date, are exactly the kind of tangle a single loan is meant to tidy up.

Some debts sit outside this. Priority debts such as council tax arrears, court fines or mortgage arrears are treated differently and carry serious consequences if ignored, so they are rarely suitable for ordinary consolidation. Whether any particular balance can be included depends on your circumstances and the lender's rules. If some of what you owe is priority debt, free advice should come before any new borrowing, because the right order of dealing with debts matters as much as the method.

How is consolidation different from a DMP or IVA?

Consolidation is often confused with formal debt solutions, but they are not the same thing. A consolidation loan is ordinary borrowing: you take out new credit and repay it in full with interest. A debt solution is an arrangement for debt you cannot repay in the normal way, and some types reduce or restructure the amount you owe.

A debt management plan (DMP) is an informal agreement, often set up through a debt charity, where you make one monthly payment that is shared among your creditors without taking out new borrowing. An individual voluntary arrangement (IVA) is a formal insolvency solution in England, Wales and Northern Ireland that legally binds you and your creditors. Both are quite different from a consolidation loan, and both can leave a lasting mark on your credit file. If the real problem is that your debts are simply unaffordable, a solution like one of these, or free advice, may suit you far better than more borrowing. Our page on alternatives to debt consolidation sets out the full picture.

Frequently asked questions