What’s debt consolidation, and how does it work?

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woman looking at bills

Debt consolidation allows you to combine some or all of your debts. That way, you need to pay off one debt instead of multiple.

It’s intended to simplify debt and make managing your money easier. However, to make sure that happens, lenders need to assess whether you can pay it back and if it’ll better your financial situation.

What’s debt consolidation?

Debt consolidation is when you combine some or all your debts. You’ll pay one repayment a month instead of multiple.

Usually, it makes managing your money easier, and you can usually save thanks to more competitive interest rates.

For example, let’s say you have five separate debts with an average interest rate of 8%. You could consolidate these debts into one payment with an interest rate of 5% over a set period of time.

In this example, the amount you'd owe stays the same, but you’d be paying 3% less in interest and make one single payment each month, rather than five different ones.

Don't forget, depending on the term of the loan, even with a lower interest you may end up paying more overall.

How does debt consolidation work?

You borrow from a lender to pay off your existing debt. Then, you owe what you borrow to one lender instead of several.

So, if you had multiple debts totalling £10,000, you’d borrow the money to pay this off. You’d then pay this sum to one lender with monthly payments for an agreed number of months or years. It works for loans, overdrafts or credit cards.

You can get secured or unsecured debt consolidation loans. Learn more about secured and unsecured loans.

How to get a debt consolidation loan

Getting one is similar to other loans. Once you’ve found a lender, it’ll need information like:

  • your identity (name, date of birth, address)
  • employment details
  • annual income
  • monthly commitments
  • other documents, like bank statements

After that, it’ll perform a hard credit check. You can read about what credit checks are here.

We have a full step-by-step guide on applying for a loan, too.

Is it a good idea?

Whether debt consolidation is a good idea depends on your financial situation.

Possible advantages include:

  • getting a lower interest rate than your existing debts
  • simplifying your money management
  • lowering the chance of you missing payments
  • better budgeting

Potential disadvantages include:

  • getting a higher interest rate than your existing debts, meaning you’ll pay back more
  • taking out a loan larger than your debt
  • paying fees

It’s important to get independent advice – Money Helper has a comprehensive guide on how to get advice.

Remember: you should financial advisers are there for help with debt consolidation and other financial problems.

Is debt consolidation right for you?

When it’s recommended

  • you have good credit
  • you have debt

The above means you can repay the loan while making your debt more manageable.

When isn’t it

  • you have poor credit
  • you don’t have lots of debt

Having both means you can’t repay the loan, or a debt consolidation loan isn’t suitable.

Other ways to consolidate or pay off debt

Use a balance transfer card

Borrowers sometimes use balance transfer cards for credit card debt. The card moves some or all debt owed on multiple cards to one.

This card has some benefits, especially if the balance transfer card has a low or no interest period.

You can pay fees, so it’s always worth getting independent financial advice before deciding.

Use retirement funds

This step only applies if you’re over 55. You can access a tax-free lump sum from your retirement fund to consolidate or pay off debt.

However, only do this if a pension or financial adviser recommends it.


Sometimes, you don’t need to consolidate debt – you need to budget your way out of it.

MoneyHelper has good advice on how to make and stick to a budget.

Use the snowball or avalanche debt method

Two popular ways to get rid of debt are snowball and avalanche.

Snowball means paying off your smallest debts first, effectively snowballing your repayments until you pay all of them off.

By contrast, avalanche means paying off your biggest debts first, giving you momentum to pay off smaller debts afterwards.

Both work, but both rely on you making a budget and seeking professional advice.

Read our article on what to do if you’re in debt.

Whatever your plans, an Admiral loan could help