What is debt consolidation?

If you’ve been finding it tricky to pay off your debt, we understand that you may have been looking into other options including debt consolidation. But perhaps you’re wondering, what is debt consolidation and how does it work?

That’s why we’ve created this guide to provide all the information you may need to help you make an informed decision as to whether debt consolidation is the right option for you.

This content is intended to be an impartial guide about debt consolidation. Lowell Financial Ltd does not offer legal or financial advice. You can find out about organisations you can contact in our guide on debt help and support.

How does debt consolidation work?

In short, debt consolidation involves moving some, or all, of your outstanding debt into one account to try and make it easier to focus on and pay off. Taking this option may also reduce any interest rates that you may be subject to across the different debts that you owe.

The most important thing to remember with debt consolidation is that you will still be liable to make payments towards the outstanding balance.

Depending on your personal circumstances, debt consolidation may not be the best option for you. For more information about the other options available to help with your outstanding debts, you can read our guide on the different types of debt solution.

How to consolidate debt

When it comes to consolidating debt, there are a few different ways that you can do this.  

You could apply for a debt consolidation loan which you can usually do via your bank or another typical lender. As different creditors offer different deals, you can shop around to find the best option for you.

There are also some companies that claim to offer ‘government debt consolidation schemes’, but these don’t exist. Instead, there are other official government-backed schemes to help with debt such as individual voluntary arrangements (IVAs) and debt relief orders (DROs).

Another way that you could consolidate debt is via a balance transfer. The idea is that you transfer your outstanding debt balance onto a low-interest credit card. This means that you only have to focus on making one payment towards this new card. However, when moving onto a new credit card, it’s important to read the terms and conditions carefully as the deal may only apply for a limited time.

If you’re unsure about anything or have just started looking into how to consolidate debt, it may be a really good idea to seek some free debt advice from organisations like StepChange and Citizens Advice Bureau who will be able to give you tailored and bespoke advice based on your individual circumstances.

Can I consolidate credit card debt?

Yes, you can consolidate credit card debt. You can do this in the same way as you would other types of debt whether that’s through a debt consolidation loan or balance transfers.

What is a debt consolidation loan?

If you’re looking into debt consolidation, it's likely that you’ll come across debt consolidation loans. To put it simply, a debt consolidation loan is a type of personal loan that you can use towards paying off your other debts. Typically, it’s used for higher-interest debts such as credit cards.

After you’ve successfully been able to get a debt consolidation loan, you’ll need to use the money to fully pay off and close the accounts of your current debts using the loan. This means that you’ll need to have asked for sufficient money as part of the loan  to cover all of your various debts.

There are two different types of debt consolidation loans:

  • Secured debt consolidation loan – A secured debt consolidation loan will involve putting up a valuable asset like your property as security for the borrowed money. The purpose for this is that if you’re unable to keep up with payments, then the secured valuable assets may end up being repossessed.
  • Unsecured debt consolidation loan – An unsecured debt consolidation loan means the loan isn’t secured against your home or other assets. With an unsecured debt consolidation loan though, you may need a strong credit score to be accepted.

Secured loans can be seen as riskier for the person borrowing the money because you’re securing valuable assets, but they may have better interest rates than unsecured loans. This is because your assets are at risk if you don’t make your payments.

Debt consolidation loans can also vary based on your credit score, the amount of money you’re asking to borrow, interest rates, as well as how long you’ll have to pay it back. When applying for a debt consolidation loan, creditors, which are the people you will owe the money to, will review both your current debt situation and credit risk.

Is a debt consolidation loan right for me?

Before making a final decision, consider seeking free and independent debt advice and support to find out what loans you can apply for and if a debt consolidation loan is right for you.

A debt consolidation loan may not be the best option for you and your circumstances, and there could be other alternatives available that may work better for you. For example, a debt management plan will consolidate all your outstanding debt payments into one. This means that you only have one payment to distribute to the debt management company, and its them that then distributes the money on your behalf to your various creditors.

Is debt consolidation bad for credit?

When it comes to understanding if debt consolidation will affect your credit score, it depends entirely on your unique and individual situation. A hard credit check will be carried out after applying for a debt consolidation loan which will be visible on your credit file.

Both taking out the loan and a hard credit check could negatively affect your score and impact future lending. If you’re interested in learning more about your credit file, we’ve already written guides on the types of credit that could affect your score as well as how to improve your credit score.

At Lowell, we've partnered with TransUnion meaning customers can access their credit score via our mobile app.

Advantages of debt consolidation

  • Your overall monthly interest rate could be less because you’ll only have one account open.
  • Having one account means you don’t have to deal with multiple different creditors and have different arrangement/payment plans in place and to maintain.
  • It may help with managing debts and keeping things simple as you only have one creditor that you owe money to.
  • You may pay off your debt earlier than expected as the money that you may be saving on interest could be used towards making direct debt payments.

Disadvantages of debt consolidation

  • Some companies may charge high fees for arranging a debt consolidation loan.
  • It may not be the right option for you if you know there’s a chance you still may not be able to keep up with repayments.
  • With a secured debt consolidation loan, you’re putting your valuable assets at risk.
  • A debt consolidation loan doesn’t write off or reduce your debt, you’re still liable to pay back the full outstanding balance.
  • Not all debts can be included in a debt consolidation loan. To find out which are eligible or not, you’ll need to speak with a debt advisor. (Details provided below.)

Where to seek help consolidating debt

Whether you’re considering a debt consolidation loan or unsure what your next steps might be, it’s always best to get expert advice and guidance based on your circumstances. If you’re a Lowell customer, we won’t be able to offer direct help in relation to consolidating debt, but we can put you in touch with those who can.

There are lots of free independent organisations such as StepChange and National Debtline that can help you figure out if there are other, more suitable, ways for you to deal with your debts.

If you’ve got any questions or concerns relating to your Lowell debt, you can get in touch with our team who are always happy to help. Alternatively, you can manage your account independently through our easy-to-use mobile app.

If you found this helpful, you can find more information on debt-related topics and how we work at Lowell over on our Debt Guidance Hub.

First published: 28th March, 2024