What is Debt Consolidation Loan?

Full Definition

A debt consolidation loan is a loan, usually an unsecured personal loan though sometimes secured against a property, taken out specifically to repay several existing debts -- such as credit cards, store cards, overdrafts or other personal loans -- in one go, leaving the borrower with a single monthly repayment to a single lender instead of juggling multiple different repayments, interest rates and due dates. The main potential benefit is simplicity and, if the new loan's interest rate is genuinely lower than the blended average rate across the debts being replaced (which is most likely for someone currently carrying high-rate credit card debt and who qualifies for a competitively priced personal loan), a reduction in the total interest paid and a clearer, fixed repayment timeline to becoming debt-free. Debt consolidation does not reduce the underlying amount owed, and it can backfire if it is used to free up credit card limits that are then run up again, effectively adding new debt on top of the consolidation loan rather than replacing it, or if the new loan is taken over a longer term that lowers the monthly payment but increases the total interest paid over the life of the loan. A secured debt consolidation loan, where an unsecured debt like credit card debt is rolled into a loan secured against the borrower's home (sometimes via a further advance or second charge mortgage), carries a materially different, more serious risk profile than an unsecured consolidation loan, since missed payments on a secured loan can ultimately put the home at risk, which is not the case with unsecured debts. Anyone struggling with multiple debts is generally advised to get free, independent debt advice (for example via StepChange, National Debtline or Citizens Advice) before committing to a consolidation loan, since in some cases a debt management plan or other formal debt solution may be more appropriate than taking on further borrowing.

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