If you're paying several lenders each month, it can become difficult to keep track of what goes out and when. Debt consolidation combines multiple debts into a single loan with one monthly payment and, depending on the interest rate, term, fees and your circumstances, that monthly payment may be lower than the total you pay now.
Debt consolidation will not suit everyone, and it does not make debt disappear. A lower monthly repayment can also mean paying more overall if the new loan runs for longer.
This guide explains what debt consolidation is, how a consolidation loan works, the difference between secured and unsecured options, and how consolidation may reduce your monthly repayments. It also covers eligibility, the key risks and where to get help if you're struggling with debt.
What is debt consolidation?
Debt consolidation is when you take out one new loan to repay several existing debts, leaving you with a single balance and a single monthly payment.
As the debt charity StepChange explains, it "joins all your debts together, usually by taking out a loan and using the money to pay back the people you owe."
The main potential benefit is simplicity. Instead of managing several debts, each with its own interest rate and payment date, you have one lender and one repayment to manage.
MoneyHelper, the government-backed guidance service, notes that if you're having difficulty managing multiple repayments, putting the total you owe into one consolidation loan could help.
However, simpler does not automatically mean cheaper.
Whether consolidation reduces your overall borrowing cost depends on factors including:
- the interest rate on the new loan;
- the repayment term;
- any fees or charges;
- the cost of your existing debts; and
- whether you continue to use credit after consolidating.
A lower monthly repayment may result from spreading the debt over a longer period, which can increase the total amount you repay.
How does a debt consolidation loan work?
A debt consolidation loan generally works in three steps.
First, you borrow enough to repay the debts you want to consolidate.
Second, you use the new borrowing to repay those debts.
Third, you repay the new consolidation loan over an agreed term.
Once the debts have been repaid, you will normally make one payment to the new lender rather than several separate payments.
The amount you repay each month will depend on factors including how much you borrow, the interest rate and the repayment term.
Not every consolidation loan will be suitable for every borrower. The type of borrowing you choose can affect the interest rate, repayment term, total amount repayable and level of risk.
One of the most important distinctions is between secured and unsecured borrowing.
Secured vs unsecured debt consolidation loans explained
The key difference is whether the loan is secured against an asset.
An unsecured loan is not secured against your home or another specific asset.
A secured loan is secured against an asset you own, commonly your home. If you do not keep up repayments, your home may ultimately be at risk.
Here's a general comparison:
A secured debt consolidation loan may be structured as a second-charge mortgage.
This means the new borrowing sits alongside your existing mortgage and is secured against your home. It does not necessarily require you to refinance your existing first mortgage.
Because secured borrowing gives the lender security over your property, it may be available at a lower interest rate than some unsecured borrowing. However, this is not guaranteed and will depend on the lender, product and your circumstances.
The trade-off is significant: if you do not keep up repayments on borrowing secured against your home, your property may be at risk.
How a secured loan may lower your monthly repayments
A secured loan may reduce monthly repayments in two main ways:
- by offering a lower interest rate than some of your existing debts; or
- by spreading repayment over a longer period.
These two factors have different effects on the overall cost of borrowing.
A potentially lower interest rate
Credit cards and overdrafts can carry relatively high interest rates.
If eligible, moving some higher-interest borrowing to a loan with a lower rate may reduce the amount of interest charged.
However, a lower interest rate is not guaranteed and does not automatically mean you will pay less overall.
A longer repayment term
Spreading the same amount of borrowing over more years can reduce the monthly repayment because the balance is repaid over a longer period.
However, this can also mean paying interest for longer.
As a result, you could pay more in total even if the monthly repayment is lower.
This is an important distinction:
Lower monthly repayments do not necessarily mean lower overall borrowing costs.
Always compare the total amount repayable, not just the monthly payment.
Selina's debt consolidation option
Selina offers secured borrowing that may be used to consolidate eligible debts.
Where appropriate, this may allow you to combine several existing debts into a single secured borrowing arrangement and could result in a lower monthly repayment, depending on the interest rate, term, fees and your individual circumstances.
Selina's Home Equity Line of Credit, or HELOC, is secured against your home and sits alongside your existing first mortgage rather than requiring you to refinance it.
You are approved up to an agreed credit limit and pay interest on the amount you have drawn, subject to the product terms.
Whether consolidating your debts in this way reduces your monthly repayment or overall borrowing cost will depend on your individual circumstances.
Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it. Think carefully before securing other debts against your home.
Am I eligible? Homeownership, equity and your credit history
Eligibility for secured debt consolidation will usually depend on factors including:
- owning a property;
- the amount of equity available;
- your income and expenditure;
- your existing financial commitments;
- your credit history; and
- the lender's affordability and eligibility criteria.
Equity is broadly the difference between the current value of your property and the amount you still owe against it.
For example, if your home is worth £300,000 and you owe £180,000 on your mortgage, you have £120,000 of equity before taking account of any other borrowing secured against the property.
Having equity does not mean you will automatically be able to borrow against it.
Your credit history will also be considered. A secured lender may assess credit history differently from an unsecured lender because the borrowing is backed by property, but this does not guarantee approval or a particular interest rate.
Affordability checks will still apply.
The Financial Conduct Authority expects lenders in the second-charge mortgage market to assess affordability and support good customer outcomes.
If a lender determines that repayments would not be affordable, the application may be declined.
The risks and responsible borrowing considerations
The most important risk of secured debt consolidation is that you are converting borrowing into debt secured against your home.
If you do not keep up repayments, your home may ultimately be repossessed.
You should also consider the risk of increasing the total amount you repay.
Extending borrowing over a longer term may reduce the monthly payment, but it can result in more interest being paid overall.
Before consolidating debt, consider:
- the total amount repayable over the full term;
- the new interest rate;
- how long you will be making repayments;
- any fees or charges;
- any early repayment charges;
- whether you are moving unsecured debt onto your home; and
- whether you are likely to use the cleared credit accounts again.
Consolidation may not be appropriate if you are already struggling to meet your existing repayments.
In those circumstances, taking on additional borrowing may not address the underlying problem.
Free and impartial debt support is available from organisations including StepChange, National Debtline and MoneyHelper. GOV.UK also provides information about options for dealing with debt.
Consolidating your debts with Selina Finance
If you are a homeowner considering debt consolidation, Selina offers secured borrowing that may be one option to compare with other available solutions.
It may allow eligible borrowers to consolidate several debts into one borrowing arrangement, but whether it reduces your monthly repayment or overall borrowing cost will depend on your individual circumstances.
Before proceeding, you should consider:
- the interest rate;
- the repayment term;
- any fees or charges;
- the total amount repayable;
- whether you are converting unsecured debts into secured borrowing; and
- the consequences if you are unable to keep up repayments.
You can visit Selina's debt consolidation page to understand how the product works, review the eligibility criteria and find out more about the application process.
You can also review the frequently asked questions or speak to an adviser if you would like to discuss your circumstances before deciding whether to proceed.
Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it. Think carefully before securing other debts against your home. If you consolidate existing borrowing, you may be extending the term and increasing the total amount you repay.
Frequently Asked Questions
Is debt consolidation bad for your credit?
Applying for a debt consolidation loan may affect your credit record because the lender will normally carry out a credit check.
Your future credit record will also depend on factors including whether you make repayments on time and how you manage other credit.
Debt consolidation does not guarantee that your credit score will improve.
Can I get a debt consolidation loan with bad credit?
It may be possible.
A weaker credit history can affect whether you are accepted, how much you can borrow and the interest rate you are offered.
Some secured lenders may assess applications differently from unsecured lenders because the borrowing is backed by property, but approval is not guaranteed and affordability checks still apply.
If you are already struggling to repay your existing debts, free debt advice may be more appropriate than taking on further borrowing.
What types of debt can be consolidated?
Some forms of unsecured borrowing may be suitable for consolidation, including credit cards, personal loans, overdrafts and store cards.
However, not every type of debt can or should be consolidated.
The debts you can consolidate will depend on the lender's criteria and your individual circumstances.
Does debt consolidation actually save you money?
Not necessarily.
Debt consolidation may reduce borrowing costs if the new loan has a sufficiently lower interest rate and the fees and repayment term do not outweigh that benefit.
However, extending borrowing over a longer period can reduce your monthly repayment while increasing the total amount you repay.
Always compare the total cost over the full term.
What is the best way to pay off debt?
There is no single approach that will be appropriate for everyone.
The right option depends on factors including how much you owe, the interest rates you are paying, your income and expenditure, and whether you are currently able to meet your repayments.
Debt consolidation may be worth considering for some borrowers who can afford their repayments and want to simplify their borrowing.
If you are falling behind with payments or struggling to meet essential expenses, free and impartial debt advice from organisations such as StepChange, National Debtline or MoneyHelper may be a more appropriate starting point.
Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it. Think carefully before securing other debts against your home. If you consolidate existing borrowing, you may be extending the term and increasing the total amount you repay.
