How debt consolidation works
Debt consolidation replaces several debts with one new loan and a single monthly repayment. Here is how the process usually works, and the points worth pausing on before you commit.
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What does consolidating your debt mean?
Debt consolidation takes several separate debts, perhaps a couple of credit cards, a store card and an overdraft, and replaces them with one new loan. You use the loan to pay off the existing balances, then repay the single loan over a set term. Instead of several payments landing on different dates, you make one monthly repayment to one lender.
That is the whole idea in a sentence: many payments become one. Our main guide to debt consolidation loans sets out the wider picture, including the types of loan and how they are priced.
Does a consolidation loan reduce how much you owe?
No, and this is the point most people get wrong. Consolidation does not shrink your balance. It changes the structure of your borrowing, and sometimes the interest rate, but the amount you owe and the cost of credit remain. What can change is how much you pay each month and how long you pay for. A longer term usually means a smaller monthly payment but more interest over the life of the loan, so a repayment that feels easier can quietly cost more in total.
The four steps of consolidating debt
Most applications move through the same four stages. Working through them in order keeps the decision grounded in real figures rather than a hopeful estimate.
Review what you owe
Gather every debt you might consolidate and note the balance, interest rate and monthly payment. Totalling these up shows what you would need to borrow and what you currently pay. The consolidation calculator helps with the sums.
Check your options and eligibility
Look at the borrowing available to you and whether it would be secured or unsecured. Lenders assess your credit history and affordability, and approval is never guaranteed. See eligibility.
Compare the full cost
Weigh the total amount repayable and the monthly repayment together. A lower monthly figure over a longer term can mean more interest overall. Use the repayment calculator to compare scenarios.
Apply and settle existing debts
If consolidation suits you, you apply to a lender. If approved, the funds are used to clear your existing debts, either paid to you to settle them, or paid directly to your creditors.
What happens after your loan is approved?
Once a loan is approved, the money is released. Depending on the lender, it may be paid into your bank account for you to settle each debt yourself, or paid directly to the creditors being cleared. Either way, confirm that every old account is fully repaid, and closed if you mean to close it. Ask each creditor for a settlement figure rather than trusting the last statement balance, because interest may have built up since.
From then on you make one monthly repayment on the new loan. If you have freed up credit cards, be careful about using them again. Running those balances back up while you are still repaying the consolidation loan can leave you worse off than when you started, and it is one of the most common mistakes to avoid. Some people choose to close or lock away the cleared cards to remove the temptation entirely.
How long does debt consolidation take?
Timescales vary widely between lenders and depend on your circumstances. Some unsecured loans can be arranged within a few days, while secured borrowing against a property usually takes longer because of valuations and legal work. Having your paperwork ready, proof of income, identity and a clear list of the debts you want to clear, tends to speed things along. Our guide on how long debt consolidation takes explains the factors involved, and none of these timescales is guaranteed.
What to check before you apply
A few minutes of checking before you commit can save a good deal of money and regret afterwards. Run through the essentials below.
- Confirm the total you would borrow and the total you would repay
- Check for arrangement fees and early-repayment charges on both the new loan and your existing debts
- Make sure the monthly repayment is affordable, allowing for changes to your income or bills
- Consider whether an alternative would serve you better
If repayments are a struggle
Free, impartial debt advice is available from MoneyHelper, StepChange and National Debtline before taking on new borrowing.
Common questions about how consolidation works
Do I have to close my old accounts after consolidating?
Not always, but it is often wise. Keeping a credit card open after you have cleared it leaves the temptation to spend on it again. If you would struggle to resist, closing the account removes the risk.
Can I consolidate only some of my debts?
Yes. You can choose which balances to include. People often leave out debts with low rates or only a short time left to run, and consolidate the more expensive ones. Work out the total cost either way before deciding.
What happens if I miss a payment on the new loan?
A missed payment can lead to charges and is likely to be recorded on your credit file. If the loan is secured on your home, falling behind could ultimately put the property at risk, so contact the lender early if you expect difficulty.
Can I repay a consolidation loan early?
Usually, though some lenders apply an early-repayment charge. Check the terms before you sign, so you know whether overpaying or settling the loan early would cost extra.
Will consolidating show up on my credit report?
Yes. The new loan and the application for it appear on your file, and the accounts you repay will show as settled. See how consolidation affects your credit score for what that means over time.