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Is a debt consolidation loan right for me?

If you have multiple forms of debt - such as personal loans, credit cards and store cards - and want to pay them all off, an easy way to do this is a debt consolidation loan.

You take out a new loan, ideally at a lower interest rate, at a term that suits you and use it to pay off your all your existing credit. Then, you have one, affordable payment to make each month, which allows you a simpler view and may help you get back in control of your finances.

Koyo uses Open Banking technology, so that we can base our lending decisions on your real financial situation - rather than what someone else says about you. Find out more at www.koyoloans.com. Representative APR 27%

Image showing how a debt consolidation loan takes multiple forms of debt and brings them together into one

Not sure if it’s right for your circumstances? We wrote a detailed article that explains whether a debt consolidation loan is a good idea for you.

In this article, we’ll give you an in-depth guide to how debt consolidation loans work, crack the mystery of credit scores and give you tips to get the best interest rate and save money on repayments.

What credit score do I need to get a debt consolidation loan?

Before answering this question, we need to quickly explain what a “credit score” or “credit rating” is and how it’s calculated. There is no one, “official” credit score - different providers work out different credit scores, and each uses its own methodology. The three mainstream providers are:

  1. Equifax
  2. Experian
  3. TransUnion

Each of these companies gathers information about you, and sells that information to would-be lenders. A key element of this is a “score”, which is calculated based on many factors. A few important things that credit reference agencies consider are:

  • Do you have a good track record of paying back debt on time?
  • Do you have any missed payments or CCJs?
  • How much credit do you currently have available to you (this includes unused overdrafts and credit cards)?
  • How much of that available credit are you currently using (this would include existing credit card debt)?
  • Are you on the electoral roll?

Debt consolidation: How do lenders calculate your credit score?

Each lender has a different scale, and a different way of calculating your score. So, Experian provides a score between 0 and 999, while for Equifax it’s believed to be 700. Most lenders use these credit scores as one data point when deciding whether to offer you a loan. A good credit rating is helpful, but it’s not the full story: lenders will also consider things like your salary and how much you want to borrow. 

Some lenders don’t rely on credit scores at all, and instead use Open Banking data when making loan decisions.

There are many different providers who offer debt consolidation loans, each of whom will have different criteria. Because of this, there is no “minimum score” required, although borrowers with a low score are likely to find it harder to find a provider willing to lend, and may have to borrow at a higher rate of interest.

Again, it’s worth bearing in mind that not all lenders use credit scores when deciding whether to offer a loan.

Some providers use things like Open Banking data, which can be useful if you’re a borrower with little or no credit history, such as a recent UK migrant.

Debt consolidation calculator: how much do you need?

If you’ve decided that a debt consolidation loan is for you, the next thing is to decide how much you should borrow. In theory, this should be a simple calculation: simply add up the value of all your outstanding debts.

In practice, some lenders may charge a fee for paying off a loan early, or offer a rebate, and you’ll need to include these in your calculations.

Once that’s done, you’ll know the precise loan amount you would need in order to consolidate all your debts. 

How quickly should I pay it off?

Your next step is to think about what time period you’d like to use to repay your loan. You have two options:

  1. Repay the debt more quickly - you’ll save money in the long term, but your monthly repayments may be higher
  2. Repay the debt more slowly - this maybe more expensive in the long term, but monthly repayments are likely to be lower

To give a simplified example: imagine you have various debts worth a total of £5,000 and are able to get a debt consolidation loan with an interest rate of 10% per year. 

If you repay the loan over one year, you’ll make 12 monthly payments of £458.33. That’s a total of £5,500.

If you repay it over a longer period, say 5 years, your monthly payments will be much lower (£125), but the amount you’ll repay will be substantially higher. In this example (for illustration purposes only), you would repay a total of £7,500: an extra £2,000 in interest.

amount borrowed

repayment term

monthly repayments

total repaid

£5,000

1 year

£458.33

£5,500

£5,000

5 years

£125

£7,500

So, as a guide, it’s best to pay off a debt consolidation loan as quickly as possible. Happily, most modern loan providers give you the option to set very precise loan terms - so you can borrow for 3 years and 5 months, for example. As a result, you can minimise the time you take to pay off the loan, reducing the total amount of interest you pay and saving yourself some money if you can afford higher monthly loan repayments.  

A good place to start is a comparison site - this will allow you to quickly compare dozens of options from mainstream providers.

However, it’s worth doing some extra homework - not all lenders are listed on comparison websites, and so you might find a cheaper option elsewhere. This is especially likely if you are new to the UK, for example, or have a bad credit history - specialist providers might have a different way of looking at things which could work to your advantage.

Apply for a debt consolidation loan

Applying for a debt consolidation loan is simple, and is almost always something you can do yourself. You don’t need to use a third party provider (sometimes called a credit broker), and you shouldn’t generally have to pay for advice.

When applying for an unsecured debt consolidation loan, providers will usually give you a representative example and ask you what you want to do with the loan (e.g. home improvements, new car). There will usually be an option for debt consolidation loan. 

Related post: Should I Take Out A Loan To Pay Off Credit Card Debt

How to get a debt consolidation loan

Many modern providers will also offer a loan calculator - this is a way for you to see precisely how much you would need to repay, and you’ll get a personalised quote, usually with a representative APR. At this point, your rate isn’t locked in - you’ll need to actually apply in order to find out exactly what interest rate and amount you’ll be offered, but the representative guides should be achievable for the majority of applicants.

Debt consolidation loans are almost always fixed rate - that means that the interest rate you pay is locked in for the term of the loan, and won’t move around like a variable mortgage might. You’ll often have a few options for how to make your loan payments, but direct debit is the most common option.

It’s also worth noting that depending on your personal circumstances, a balance transfer card might also be a good option. Again, we’ve gone into more detail on this and answered some FAQs in our guide to whether a debt consolidation loan is right for you

Hopefully you’ve found this guide useful. But if there are any questions we haven’t answered, we want to know about it - let us know in the comments section below!

Now that you’ve read our article on debt consolidation loans, you might want to take a look at some of the options available to you. Our loan calculator is a great place to start.

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