What is a debt consolidation loan?
A debt consolidation loan is designed to help you get on top of multiple debts by moving some or all of them to one place. That could mean one loan with one interest rate and one monthly repayment.
Debt consolidation loans can be secured or unsecured.
A secured loan (or homeowner loan) is designed for homeowners, as the loan is tied to your property. This means you may find it easier to get approved and borrow a larger sum of money to consolidate your debts - even if you have bad credit. But it’s important to only borrow what you can afford to repay, so you don’t fall behind and put your property at risk.
An unsecured loan (or personal loan) doesn’t require any collateral, so borrowers don’t need to provide an asset as security. However, you may need a good credit score to be accepted and get a competitive interest rate.
Pros and cons of a debt consolidation loan
Pros | Cons |
All or some of your debts will be in one place, potentially making them easier to manage. | It may not be worthwhile if you have a smaller amount of debt or terms that are due to end soon. |
You could be eligible for a lower interest rate than you’re currently paying. | Your interest rate may be higher if you don’t have a strong credit score. |
Your monthly repayments may be lower going forwards if you spread the repayments. | You could end up paying more in total if you spread your repayments over a longer period. |
Your credit score may improve if you keep up with your repayments. | Your credit score may drop if you don’t keep up with your consolidation loan repayments. |
Howto get a debt consolidation loan
There are typically five stages to getting a debt consolidation loan:
- Preparing to apply
- Checking your eligibility
- Applying for a loan
- Paying off your existing debts with the loan
- Repaying the loan
1. Preparing to apply for a loan
Assess your financial situation
Before applying for a loan, check if there are any changes you can make to boost your chances of approval. For example, you could improve your affordability by creating a budget and cutting out nonessential outgoings.
Check your credit report
You can check your credit score and report for free using the three UK credit reference agencies, Experian, Equifax, and TransUnion. This helps you understand what information lenders can see when you apply for credit. Plus, it allows you to spot and flag any mistakes that could hinder your application.
If you have poor credit, you could consider taking out a bad credit loan to consolidate your debts. These loans are easier to get approved for but tend to come with higher interest rates than regular consolidation loans.
Or you could take steps to improve your credit score and then apply for a loan in the future. For example, registering to vote and limiting credit card spending can boost your rating.
Read our tips on how to boost your credit score fast.
Consider your loan options
Before making an application, there are some important things to check, such as:
- The amount you want to borrow – and whether it covers all or some of your existing debts.
- The monthly payment amount- and whether it’s affordable.
- How long you want to repay the loan for - if you spread your repayments over a longer term, you could pay less each month, but you may end up paying more in total.
- The proposed interest rate- compared to the interest rates on your current debts.
- Any additional fees or charges – such as early repayment charges if you pay off the loan before the end date.
If you only have credit card debt, you may wish to apply for a balance transfer credit card instead of a loan – especially if you qualify for a lower interest rate or owe a small amount.
2. Checking your eligibility
Your eligibility for a debt consolidation loan depends on your individual circ*mstances and the lender.
Each UK lender has their own criteria, but most will require you to be a UK resident aged 18 or over. They will usually look at other factors such as your credit history, employment history, and affordability.
You can use an eligibility checker to find out whether you qualify without affecting your credit score. This means you don’t make multiple credit applications in a short space of time, as this will cause your rating to dip temporarily.
3. Applying for a debt consolidation loan
When you apply for a debt consolidation loan, you’ll need to provide:
• Personal details – e.g., full name, date of birth, and address history
• Employment information – e.g., name of employer, occupation, and income
• Amount you need to borrow
• Reason for applying – e.g., to consolidate debt, to make home improvements
Required documentation may include:
• Proof of ID – such as a passport or driving licence
• Proof of address – such as a utility bill (usually dated within the past three months)
• Proof of income – such as recent payslips or bank statements
The lender will use this information to review your circ*mstances and perform a hard check on your credit report. This will give them an idea of how risky it’d be to lend to you, based on your past financial behaviour.
4. Paying off your existing debts
If your consolidation loan is approved, you could receive the funds in two different ways, depending on the lender:
- A lump sum paid directly into your bank account, and you’ll be responsible for paying off your existing debts.
- Funds released directly to your creditors – if your lender agrees to this.
5. Repaying the loan
You will need to repay the loan (including interest) in fixed monthly repayments, over a set amount of time. By always making your payments on time, you can build a strong payment history and improve your credit score over time.
What happens if I don’t qualify for a debt consolidation loan?
There are many reasons why a debt consolidation loan application may be refused. But this doesn’t mean you’re out of options.
You could consider checking your eligibility for a loan with a different lender. At Ocean, for example, we work with lenders who accept people with poor credit histories.
There are other solutions available that may be right for you and your circ*mstances. For example, if you are struggling with debt, you could consider asking your lenders to set up reduced payment plans. To find out more, you can access free financial advice and support from a professional debt specialist. Visit Money Wellness, StepChange, Citizens Advice, National Debtline, or MoneyHelper to find out more.
Check your eligibility for a debt consolidation loan
- Reduce your monthly payments
- Personal and homeowner loans available
- Getting a quote is FREE and won't affect your credit score
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Intelligent Lending Ltd is a credit broker, working with a panel of lenders. Homeowner loans are secured against your home.
Disclaimer: All information and links are correct at the time of publishing.
Personal Finance Writer
Adele is a personal finance writer with more than 10 years in the finance industry behind her. She writes clear and engaging guides on all things loans for Ocean, as well as contributing blogs to help people understand their options when it comes to money.
