Skip to main content

Debt consolidation loans and personal loans are often misunderstood, which is a shame because they’re both very simple ways to borrow money.

The confusion comes from the fact that a debt consolidation loan is a personal loan - the only difference is that it has a specific purpose: to help you consolidate your debts.

That’s the post in a nutshell, so perhaps that’s all the information you need. If so, and you’re looking for a flexible personal loan of £1,500-12,000, you can take a look at our loan calculator or make an application at www.koyoloans.com. Representative APR 27%

If you want to find out more though, read on!

A debt consolidation loan is a personal loan that you use to consolidate debts.

What’s the difference between a debt consolidation loan and a personal loan?

First of all, let’s clarify what a personal loan is. Here are the defining features:

  1. You borrow a fixed amount of money, which you receive as a lump sum

  2. You repay the total amount in monthly installments, plus interest

  3. You’ll always have a fixed rate of interest (unlike a tracker mortgage, for example), so you know exactly what you’ll have to repay each month

That’s pretty much it. You can use a personal loan for all sorts of things - for example, you could:

  • Buy a new or used car,

  • Pay for some home improvements,

  • Spread out the cost of a holiday, or,

  • Consolidate your debts

So a debt consolidation loan is simply a personal loan that you use to consolidate debts (more on that below). There’s nothing special about it, and the confusion probably comes from the fact that some companies market their products as “debt consolidation loans” in an effort to appeal to borrowers.

What is a personal loan?

We’ve covered the basics above, and there’s not much more to it than that. One thing to watch out for though is that while you can use a personal loan for pretty much anything you like (other than obvious no-nos like gambling or crime), you do have to disclose the purpose of the loan during the application process.

Every lender has different criteria, and some have strict rules around the kind of loan they’ll offer so you might run into the occasional lender who doesn’t offer debt consolidation loans.

What is a debt consolidation loan?

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

How does it work? Imagine you currently have three credit cards, with £1,000 outstanding on each:

  1. A credit card, with a 20% interest rate

  2. A high-interest credit card, with a 30% interest rate

  3. A store card, with a 40% interest rate

You currently have £3,000 outstanding in total and are paying an average interest rate of 30%.

That’s a relatively high rate of interest, and you also have three monthly bills to keep on track of.

If you could get a debt consolidation loan of £3,000 with an interest rate lower than 30%, that means you’d be able to pay off the balance right away, saving you money over the long term and helping you to keep track of your bills. Instead of three different cards to deal with and budget for, you’d only need to worry about a single loan.

Want to know more? Take a look at our more detailed guides: how to consolidate credit card debt and how debt consolidation loans work.

When should you use a personal loan for debt consolidation?

There are two questions you should ask yourself if you’re considering a personal loan:

  1. Will I be able to afford my new monthly repayments?

  2. Will I save money over the long term?

The first question is pretty straightforward to answer. You can use a loan repayment calculator to work out exactly what your payments would be over the repayment term (with a representative example) and see how that matches up with your monthly budget. 

The second question is a little more nuanced and depends on how quickly you’ll be able to pay off the personal loan, compared to paying off the credit card debt. As a general rule, if you’re paying money off over the same period of time, but at a lower rate of interest, you’ll save money.

Where things get a little more complex is when you pay off money at a lower rate of interest but take longer to do so - there are good reasons for doing this (it might make your monthly repayments more manageable), but since you might end up paying more in total interest, it’s something to avoid if possible.

If you’re in doubt, Step Change has a great calculator to work out if you’ll be saving money over the long term, and we’ve also written a separate guide to when a debt consolidation loan is a good idea.

Does debt consolidation affect your credit score?

Yes - in the short term, a new debt consolidation loan (or any new form of debt) will cause your credit score to dip slightly. However, over the medium and long term, as you make your repayments, your score should increase. That’s because paying off credit is the surest way to improve your score.

We’ve actually covered this topic in a lot more detail elsewhere: does a debt consolidation loan affect your credit score?

What other ways are there to consolidate debt?

The other mainstream tool for consolidating debt is to use a balance transfer credit card.

A balance transfer credit card allows you to bring multiple credit card debts onto one new card. This makes it easier to keep track of your repayments, and on top of that, many balance transfer cards offer a 0% introductory rate, which can last more than two years.

If you’re eligible for a deal such as this, it can be a cost-effective way to consolidate your current debts, but there are two things to look out for:

  1. Transfer fees, which typically come to around 3% of the amount you’re consolidating

  2. How long the interest-free period lasts - often at the end of this period, you’ll face a higher rate

As with a debt consolidation loan, so long as you’re comfortable that you’ll be saving money over the long term and can afford to make all required payments, this can be a good way to consolidate debt.

However, there’s one other thing to consider, which is your willpower! With a personal loan, you have to make the same payment every month - that means you can go on autopilot, and pay off your loan without having to think too much about it. With a balance transfer credit card, you decide how and when to pay it off, which might mean you’re tempted to just kick the can down the road.

Next steps

Hopefully, you’ve found this guide useful. If you want to read a little more, about next steps, we’ve got you covered: how to get a debt consolidation loan.

If you’re looking for a flexible personal loan of £1,500-12,000, you can take a look at our loan calculator or make an application at www.koyoloans.com. Representative APR 27%.

And if there’s anything we haven’t answered, let us know in the comments section below!

Frequently asked questions about debt consolidation vs personal loans

Is it better to get a personal loan or debt consolidation?

As we’ve explained above, they’re one and the same! A debt consolidation loan is simply a personal loan that you use to consolidate debt. Used thoughtfully, it can be an effective way to get in control of your finances, and save money.

Is it smart to take out a personal loan to consolidate debt?

A debt consolidation loan can be a smart, effective way to consolidate debt and take control of your finances, but you’ll want to make sure that, at a minimum:

  1. The monthly payments on your new loan would be affordable (otherwise you risk getting into financial difficulties)

  2. You’ll repay less interest over the loan term (i.e. you’ll save money)

Can I still get a debt consolidation loan if I have a bad credit score?

Absolutely. Just like all forms of personal loan, there’s a lot of choice out there. However, borrowers with a less than perfect credit rating will have fewer options than those with a good credit history. That means they might not be able to get the lowest interest rates or the highest loan amounts but should still have plenty of lenders to choose from.


If your credit score is a problem but you’d be able to afford the repayments, it might be worth looking at Open Banking lenders such as Koyo, who use Open Banking technology to securely view your bank account data, meaning they can make lending decisions on your true financial position rather than basing it solely on what a credit bureau says about you.

Leave a Reply