Debt consolidation loans promise to simplify your finances and reduce your monthly outgoings — but they don’t always save you money. In this guide, we’ll show you exactly when consolidating debt makes sense, when it doesn’t, and how to calculate whether it will save you money before you apply.
What Is Debt Consolidation?
Debt consolidation means taking out a single new loan to pay off multiple existing debts — credit cards, overdrafts, store cards, or other loans — leaving you with one monthly payment instead of several. The idea is to replace high-interest debts with a single lower-rate loan, reducing your total monthly outgoings and the total interest you pay.
Use our loan calculator to work out what your consolidated monthly repayment would be at a given rate and term, then compare that against your current combined monthly payments.
When Debt Consolidation Makes Sense
Consolidation genuinely works when your new loan rate is lower than your existing debts’ average rate. Here’s a real example:
| Debt | Balance | Rate | Monthly Payment | Months Left |
|---|---|---|---|---|
| Credit Card A | £2,500 | 22.9% | £80 | ~48 |
| Credit Card B | £1,800 | 29.9% | £65 | ~52 |
| Store Card | £900 | 39.9% | £40 | ~36 |
| Overdraft | £1,300 | 40% | £55 | Ongoing |
| Total | £6,500 | ~30% avg | £240 |
After consolidating into a 3-year loan at 7.9%:
- Monthly payment: £203/month (saving £37/month)
- Total interest: £810 vs approximately £3,200 across all original debts
- Total saving: approximately £2,390 in interest
This is a clear case where consolidation saves significant money — both monthly and overall.
When Debt Consolidation Doesn’t Work
Consolidation can actually cost you more if you’re not careful. Here are the situations where it goes wrong:
- Extending the term too long — A lower monthly payment over a longer term might save money monthly but cost more in total interest. Always check total repayment, not just monthly cost
- Not qualifying for a low rate — If your credit score is poor, you may only qualify for a consolidation loan at 15–20%, which may not be better than your current debts
- Continuing to use cleared cards — The most common mistake: consolidating cards then building the balance back up, leaving you worse off than before
- Including secured debt — Rolling unsecured debt into a secured loan (like a second mortgage) puts your home at risk. Only do this after very careful consideration
How to Calculate Whether Consolidation Will Save You Money
- List all your current debts, their balances, rates, and monthly payments
- Calculate the total interest you’ll pay across all debts if you continue as normal
- Use our loan calculator to calculate total interest on a consolidation loan at your quoted rate
- Compare total interest + any consolidation loan fees against your current total interest projection
- Only consolidate if the total saving is meaningful and you commit to not using cleared credit again
Alternatives to Debt Consolidation
| Option | Best For | Key Consideration |
|---|---|---|
| 0% Balance Transfer Card | Credit card debt under £10,000 | Transfer fee 2–4%; must clear in 0% period |
| Debt Management Plan | Cannot afford minimum payments | Free via StepChange; affects credit score |
| Avalanche Method | Disciplined self-managed repayment | Pay highest-rate debt first; saves most interest |
| Snowball Method | Motivational boost needed | Pay smallest balance first; builds momentum |
| Secured Loan / Remortgage | Homeowners with significant equity | Lower rate but home at risk; long-term cost |
Debt Consolidation FAQ
Will debt consolidation hurt my credit score?
Applying for a consolidation loan triggers a hard credit search, which temporarily reduces your score. However, if the loan is approved and you make all repayments on time, your score will recover and likely improve over the following months as your overall debt reduces.
Can I consolidate loans if I have bad credit?
Yes, but the rates available to you will be higher — potentially making consolidation less beneficial. If your credit score is low, consider working with a free debt charity like StepChange or Citizens Advice before applying for additional credit.
What happens to my old cards after consolidating?
Technically you can keep them, but many financial advisers recommend closing or cutting up cleared cards to remove the temptation to build up the balance again. If you do keep them, treat them as emergency-only tools with a strict self-imposed limit.
How much can I save by consolidating?
It depends entirely on the difference in rates and the loan terms. Use our loan calculator to model your specific scenario — entering your total debt as the loan amount and your quoted rate to see the total interest cost compared to your current debts.
Related Calculators
- Loan Calculator — Model your consolidation loan repayments and total cost
- APR Calculator — Calculate and compare the true APR of any loan
- Interest Calculator — Calculate total interest on existing debts
- Percentage Decrease Calculator — Calculate your interest rate reduction
- Savings Calculator — Redirect monthly savings once debt is cleared