Personal loans for debt consolidation

How do you use a personal loan to consolidate debt?

A personal loan is a straightforward, fixed-term loan for a set amount. Nothing makes a loan a "consolidation" loan except how you use the money: if you take out a personal loan and use it to clear several existing debts, you have consolidated them. You then repay that one loan in equal monthly instalments until it is gone.

Most personal loans used this way are unsecured debt consolidation loans. They are not tied to your home or any asset, so approval rests on your credit history and affordability. The practical appeal is the same as any consolidation: one lender, one payment date, one balance to track, instead of several.

Fixed repayments and a clear end date

The feature that makes a personal loan well suited to consolidation is its structure. Most are fixed-rate loans, so the interest rate, and therefore the monthly payment, is set at the start and does not change. You know exactly what leaves your account each month and exactly when the debt will be cleared.

That predictability is a real advantage over revolving credit such as credit cards or an overdraft, where the balance, minimum payment and interest can all drift. With a personal loan, every payment chips away at the balance on a fixed schedule, so the debt has a definite finish line. You can see how the rate and term change the monthly figure and the total repaid using the loan repayment calculator.

Is a personal loan the same as a branded "consolidation loan"?

You will see some loans marketed specifically as "debt consolidation loans". In most cases these are simply ordinary personal loans with a consolidation label attached, and the mechanics are identical. Knowing this helps you shop on the numbers rather than the name.

Because the two are usually the same thing, the sensible approach is to compare any loan on its rate, term, fees and total cost, never on whether the word "consolidation" appears in its name. Our guide on how to compare debt consolidation loans walks through exactly how to do that.

What should you check before you apply?

Two things catch people out most often: fees, and the rules on paying the loan off early. It is worth running through the whole list below before you commit.

• Arrangement or product fees. Some loans carry an upfront fee that may be added to the balance. A fee can wipe out the benefit of a slightly lower rate, so include it in your comparison.
• Early settlement terms. If you might repay early, check for an early settlement charge. Under UK consumer credit rules you can usually settle early, but a lender may charge a limited amount of interest.
• The rate you are actually offered. Advertised rates are "representative" and only have to be offered to a proportion of accepted applicants. Your personal rate may differ, so judge the loan on your own offer.
• The term. A longer term lowers the monthly payment but raises the total interest. Pick the shortest term you can comfortably afford.
• Affordability. Be honest about whether the repayment fits your budget every month, not just in a good one.

How long does a personal loan take to arrange?

Timescales vary by lender, but an unsecured personal loan is usually quicker to set up than secured borrowing because there is no property valuation or legal charge involved. Many applications are decided quickly once you have supplied proof of income and identity, and the funds can follow soon after approval.

Where delays creep in, it is often over paperwork, confirming income, address history or existing balances. Having those details to hand before you apply tends to smooth the process. Bear in mind too that applying leaves a hard search on your credit file, so it pays to settle on the loan you want rather than applying to several in quick succession.

Who a personal loan for consolidation suits

• People with a reasonable credit record who may qualify for a rate lower than their current debts.
• Borrowers who want certainty, a fixed payment and a fixed end date, rather than the open-ended nature of revolving credit.
• Anyone consolidating a manageable amount of debt who does not want to, or cannot, secure borrowing against their home.

Who it does not suit

• People whose payments are already unaffordable. A new loan does not fix a shortfall between income and outgoings.
• Borrowers likely to clear their cards and then spend on them again, ending up with the loan and fresh card debt.
• Those who would only be offered a high rate, where the cost of the loan outweighs the benefit of consolidating.

Frequently asked questions