Debt consolidation loans are one way of dealing with overwhelming debts – read our guide to learn more
By taking out another loan to pay off a number of smaller debts, you may be able to reduce your monthly payments and simplify your finances. We look at the benefits and drawbacks of debt consolidation loans.
You can use a debt consolidation loan to clear a number of smaller debts. Loan consolidation just means grouping your debts into one loan, you will only have one creditor to deal with and just one monthly repayment.
Debt consolidation loans can reduce the pressure that you're feeling from creditors. Bear in mind that these loans often spread the debt over a longer period of time, meaning that you may be in debt for many years.
You should think carefully before choosing to consolidate your debt, because there may be better options available to you. Debt consolidation loans only transfer your debts, unlike bankruptcy or an Individual Voluntary Arrangement (IVA), which reduce the amount you pay back.
If your existing debts carry high interest rates (e.g. on credit cards or store cards), you may be able to get a loan with a lower rate. If you have high levels of debt, banks may only offer you a loan with a high interest rate.
You'll need strong willpower if you take out a debt consolidation loan, because the credit cards that you clear with your loan will remain open (unless you close the accounts). The temptation to continue spending beyond your means may be hard to resist.
If you've already consolidated your debts, it's probably not wise to try consolidating debt again. A more formal debt solution might be more effective at helping you break the cycle of debt.
Loan consolidation may help you:
Debt consolidation may not suit you because:
Borrowing more money in order to pay off debts is rarely a good idea. So think carefully before consolidating your debts with a new loan.
If you're good at controlling your spending and are keen to avoid the penalties that come with IVAs and bankruptcy, then a debt consolidation loan might be what you need.
Before making a decision, speak to an impartial advisor to get advice on all available options.
Depending on your level of debt and your circumstances, you may find that an Individual Voluntary Arrangement, bankruptcy or a Debt Relief Order is a more helpful way to take control of your debt. The Consumer Credit Counselling Service or the Citizens Advice Bureau offer free, impartial debt advice and will help you understand your options.
You could also look into managing your debts with a balance transfer card which could reduce interest and make repayments more manageable. Read our dedicated guide to find out if a balance transfer card is a good option for you.