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Representative example: If you borrow £35,000 over 14 years at a rate of 8.95% variable, you will pay 168 instalments of £418.88 per month and a total amount payable of £70,371.84. This includes the net loan, interest of £30,326.84, a broker fee of £3,550 and a lender fee of £995. The overall cost for comparison is 11.8% APRC variable.

Typical 11.8% APRC variable. Maximum APRC 24.9%

Minimum loan term of 1 year. Maximum loan term of 30 years.

Paying off your debts with a debt consolidation loan

If you have built up debts on credit cards, car finance, an overdraft, store finance or any other borrowing, you may be able to save money by combining the debts into a single larger loan. Average interest rates on credit cards for purchases are around 20% or more, and borrowing money with an overdraft could cost up to 40%. Personal loan interest rates can be as low as about 3%. Someone with a credit card with an APR (annual percentage rate) of 20% would pay £200 of interest on an average balance of £1,000 in a year. By moving more expensive debts to a personal loan with a lower rate, they could save money and pay it off more quickly.

When could a consolidation loan be a good idea?

Consolidating several debts into a single loan could reduce the amount of interest charged on the money owed and mean that it is repaid after a set period of time. With other open-ended types of borrowing, like, credit cards or overdrafts it is easy to keep borrowing money, and as a result, it could take much longer to repay the debt, or for the level of debt to remain stubbornly high.

The risks of consolidating debts into a loan

Combining several more expensive debts into a single large loan could be a good idea, but there are some things to watch out for:

  • Check that the new loan is cheaper overall than the cost of repaying the existing debts over the same period of time. APRs on loans, and other forms of borrowing, mean that a loan with a lower APR should cost less than debt with a higher APR repaid over the same period.
  • If existing debts are consolidated into a loan, it can be easy to carry on building up more debt on the credit cards or overdrafts that have been cleared with the new loan. To avoid this once debts are consolidated, avoid accumulating more debt on the credit cards or overdrafts that created the debt in the first place.
  • Consolidating existing debts into a larger loan may not be the best solution if you are struggling to manage your finances. For example, if your income has reduced because of illness or redundancy, or your outgoings have increased. If you are struggling to make ends meet and are worried about your debts getting out of hand get some free debt advice from, Citizens Advice, National Debtline or Stepchange, for example.
  • Consolidating debts into a loan can lower the amount of interest charged on the debt, although paying the debt back over a longer period, even at a lower interest, could mean that more interest is charged because the debt is owed for an extended period.

How do loan companies set interest rates?

The lowest interest rates tend to be for personal loans of £7,500 to £15,000 repaid over 3 to 7, or 8 years. Loan companies have to advertise their loans using representative interest rates. The representative interest rate is the interest rate that at least 51% of people accepted for the loan are given or less. Of course, this means that 49% of people accepted for the loan could get a possibly much higher interest rate.

When you apply for a debt consolidation loan, the lender decides if it will lend money to you and at what interest rate using credit scoring. The lender calculates your credit score by looking at your application's details, like, how long you have lived at your address and how long you have been with your bank and your income etc. Lenders also usually get information from a credit reference agency. You score a number of points based on the information your credit file contains. Lenders look at whether or not you are on the voter's roll (also known as the electoral roll), how you have handled your existing credit commitments, like loans and credit cards etc. If your total score is high enough, you are accepted for the loan, and if the score is below a certain point, your application is turned down. The lender also uses your credit score to decide what interest it charges you for the loan.

How to shop around for a debt consolidation loan?

When you shop around for any form of credit, like credit cards, personal loan or car finance, you should be aware that a credit application search is recorded on your credit file each time you apply for credit. Too many credit application searches can reduce your credit score, at least for around three to six months. However, you can shop around for a new loan or other credit without it affecting your credit score if you find a credit company that does a soft search or quotation search instead.

Increasingly loan companies and other lenders offer quotation searches, soft searches or eligibility searches that allow the lender to decide how much it can lend you and at what interest rate without it affecting your credit score. Like a credit application search, a quotation search uses the details in your credit application and information from a credit reference agency to assess your creditworthiness. If you decide to accept the offer of finance, the lender turns the quotation search or soft search into an application search.

Paying off debt with a credit card instead

Instead of a personal loan, you could use a 0% balance transfer card to transfer credit card debt and pay no interest for up to around 28 months. Balance transfer credit cards typically charge a balance transfer fee of up to 3%. It is also possible to pay off existing debts by transferring money to your bank account using a money transfer credit card with typical fees of 4%.

Remortgaging and secured loans

If you have a mortgage already, you may be able to borrow money to pay off your debts by remortgaging or by taking out a secured loan. See the Guide to Remortgaging and our secured loans page to find out how they work.