What does it mean to consolidate loans?

What does it mean to consolidate loans?

Combining a lot of smaller loans into one big one could save you money, but may also be risky.

Consolidating a loan basically means taking out a loan from one creditor to pay off existing debts from many creditors. You then only have one amount to think about and pay each week or month.

The idea behind a consolidation loan is to simplify the administration of debt repayment. You only have to deal with one creditor and you could end up paying less in interest payments every month, but it doesn’t work like that for everyone, so it’s not a fool-proof option. To read more about interest rates, click here.

Merging loans tends to be more cost-effective if you take one of these loans out against a large asset like your house, but this can be dangerous because if you can’t pay back, that asset (in this example, your home) can be repossessed.

Also, depending on the terms and conditions on those smaller loans, there can be extra fees for paying off a debt in one go that you should take into account before you make any decisions.

Consolidating debts can make them more manageable, enabling you to clear them over time. Remember, merging your loans is not a solution to debt as the debt still exists. Instead, can you change your spending habits? If you’re overspending whilst you have small loans, you’ll end up in a similar situation, even if you do combine your loans.

The key, therefore, is to not only merge your debt, but change your spending too. If you need help, we have a range of budgeting articles here.

If you need money advice, the Money Advice Service, National Debtline and StepChange are all independent bodies which can help.


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