Should I Consolidate My Debts? A Plain-English Guide to Debt Consolidation in the UK
Published 12th of March 2013·Updated 30 March 2026
Reviewed by: Reviewed for accuracy April 2026
Debt consolidation means combining multiple debts into a single monthly payment, usually through a consolidation loan or a debt management plan. It can simplify your finances and reduce your monthly outgoing, but it does not always reduce the total amount you owe. Whether it helps you depends on the interest rates involved and how long you take to repay.
Short Summary
Consolidating high-interest debts such as credit cards and overdrafts into a lower-interest personal loan can save you money in interest and help you clear debt faster. The key question is whether the new loan's interest rate is genuinely lower than the rates you are currently paying.
A debt management plan (DMP) through a free, FCA-regulated provider such as StepChange is different from a consolidation loan. In a DMP, you make one monthly payment to the provider, who distributes it to your creditors. Interest may be reduced or frozen, and there is no new borrowing involved.
Secured consolidation loans, where the debt is secured against your home, carry significant risk. If you cannot keep up repayments, you could lose your home. Free debt charities strongly advise against securing unsecured debts against your property.
If your debt problem is serious, consolidation alone may not be enough. Speaking to a free debt adviser from StepChange (0800 138 1111) or Citizens Advice before taking any action is the most important first step.
What is the difference between a consolidation loan and a debt management plan?
A consolidation loan is a new loan you take out to pay off existing debts. You then repay the loan in monthly instalments at a fixed interest rate over a set term. This works best if the new loan's APR is lower than the weighted average of the rates you are currently paying across all your debts.
A debt management plan (DMP) is an informal arrangement between you and your creditors, negotiated through a third party. You make one monthly payment to the DMP provider, who distributes it proportionally to your creditors. Free DMP providers include StepChange, PayPlan, and the National Debtline. Some commercial DMP companies charge fees; you do not need to pay for this service. Both approaches simplify your repayments, but only the loan involves new borrowing.
| Feature | Consolidation loan | Debt management plan (DMP) |
|---|---|---|
| New borrowing required | Yes | No |
| Interest rate | Fixed; depends on credit score | May be reduced or frozen by creditors |
| Credit score impact | New hard search; may affect score | Negative while on plan |
| Cost | Interest charges | Free via StepChange or PayPlan |
| Legal status | Binding loan agreement | Informal arrangement |
| Best for | Good credit score; high-interest debts | Poor credit; unmanageable multiple debts |
How do I know if a consolidation loan will save me money?
Work out the total interest you will pay on your current debts over the time it would take to clear them. Then calculate the total interest on the consolidation loan over its term. If the loan total is lower, consolidation saves you money.
Watch out for loans that reduce your monthly payment by extending the repayment term significantly. A lower monthly payment over a longer period often means you pay more interest in total, even if the rate is lower. Use a loan comparison site such as MoneySuperMarket or Experian to compare APRs, and always check the total repayable amount, not just the monthly payment.
What should I do before applying for a consolidation loan?
Before applying, gather statements for all your debts including credit cards, overdrafts, personal loans, and any buy-now-pay-later balances. List the outstanding balance, interest rate, and minimum monthly payment for each one. Total them up to understand the full picture.
Next, calculate your monthly budget: total take-home income minus essential outgoings (housing, utilities, food, transport) gives you the maximum you can afford to repay each month. If this figure is very low, a consolidation loan may not be approved or may not be affordable. In that case, a DMP or another form of debt solution such as an IVA (Individual Voluntary Arrangement) may be more appropriate.
Is debt consolidation bad for my credit score?
Applying for a consolidation loan involves a hard credit search, which can temporarily reduce your score by a few points. However, if the loan is approved and you make all payments on time, your score should improve over the following months as you reduce your overall debt level and demonstrate consistent repayments.
Closing multiple credit card accounts at once after consolidation can temporarily reduce your available credit and affect your utilisation ratio. A debt management plan will be recorded on your credit file and will affect your score for the duration of the plan and for six years from the date of the plan's completion.
What are the risks of debt consolidation?
The main risk is extending repayment so far that you pay more interest overall, even at a lower rate. A second risk applies specifically to homeowners: secured consolidation loans, which are sometimes marketed by specialist lenders, use your home as collateral. If you cannot keep up repayments on a secured loan, your home is at risk. Free debt charities consistently advise against turning unsecured debt into secured debt.
A third risk is behavioural: clearing credit card balances through a loan and then running them up again leaves you in a worse position than before. If you consolidate, close or significantly reduce the credit limit on the cards you clear.
Frequently Asked Questions
Will debt consolidation affect my mortgage application?
Yes, it can. A consolidation loan or DMP will appear on your credit file and lenders will see it. Most mortgage lenders view a DMP negatively during the plan and for some time after. A consolidation loan that you are repaying on time is generally viewed more positively. If you are planning to apply for a mortgage within the next one to two years, speak to a whole-of-market mortgage broker before taking any debt action, as the timing matters significantly.
Can I consolidate debts with a bad credit score? It is harder but not impossible. Specialist lenders including Shawbrook Bank, Hitachi Personal Finance, and Oakbrook Finance consider applicants with impaired credit histories, though the interest rates are higher than for mainstream lenders. Use an eligibility checker (which uses a soft search) before making a formal application. If rates are very high, a DMP through StepChange may be a better option.
Is there a free debt consolidation service in the UK?
StepChange and PayPlan both offer free debt management plans where your creditors are contacted on your behalf and a consolidated payment is arranged. Neither charges a fee; they are funded by voluntary contributions from creditors. The National Debtline (nationaldebtline.org) also provides free, impartial advice. You should never have to pay for a debt management plan.
How long does a debt management plan last?
A DMP continues until your debts are fully repaid at the agreed monthly amount. There is no fixed term; the length depends on the total debt and the monthly payment agreed. Most DMPs last between 3 and 7 years. You can increase your monthly payments at any time to shorten the plan, and there is no penalty for doing so.
What is the difference between a DMP and an IVA?
A debt management plan is an informal arrangement with no set end date. An IVA (Individual Voluntary Arrangement) is a formal legal agreement between you and your creditors, arranged through a licensed insolvency practitioner. An IVA typically lasts five or six years, after which any remaining debt included in the arrangement is written off. An IVA is recorded on the public Insolvency Register and affects your credit file for six years. It may be a better option than a DMP if your debts are very large or your creditors are unlikely to cooperate with an informal arrangement. A free debt adviser can help you understand which is right for your situation.