How much can I save by consolidating debt?

How much you can save by consolidating debt depends on three things: the difference between what you're currently paying and the rate on your new loan, the length of the term you choose, and the fees involved in setting up the new loan. There's no single average figure that applies to every homeowner, because these three variables can pull in different directions.

Consolidating usually means combining several unsecured debts, such as credit cards, overdrafts, store cards, and personal loans, into one new loan secured against your home. Lenders can often offer more competitive terms on a secured loan than you'd get from unsecured credit, because your property reduces their risk. That's the main source of any potential saving.

But "saving" can mean two different things, and it's worth being clear about which one matters to you. A lower monthly payment usually comes from spreading your existing debt over a longer period, which can ease your monthly budget even if the total cost doesn't fall much, or rises. A lower total cost means you pay back less overall, which depends much more on the rate difference than the term.

The bigger the gap between what you're currently paying and the cost of your new secured loan, the more you stand to save. Credit cards, store cards, and short-term or payday loans tend to carry the highest costs of any consumer credit, so consolidating this type of debt into a secured loan is where the largest savings are usually found.

Secured loans generally cost less than credit cards and short-term credit because your property provides security for the lender, which reduces their risk. They may cost more than the very cheapest unsecured personal loans or a 0% balance transfer card, though, so it's worth checking those options too if your credit history and existing debt levels would qualify you for one.

Your own rate depends on your credit history, how much equity you have in your property, your income, and the lender you're placed with. Rather than assume a figure, it's worth speaking to an advisor who can compare a wide range of lenders and give you a rate based on your actual circumstances.

Extending your repayment term is the main reason monthly payments fall when you consolidate, but it's also the main reason your total cost can rise, even at a lower rate than you're paying now. Spreading the same amount of borrowing over a longer period means more interest accumulates over time, regardless of the rate.

This is why two people consolidating the exact same debts, with the exact same lender, can end up with very different outcomes purely based on the term they choose. If your main goal is reducing your monthly outgoings, a longer term may suit you, even though it can increase the total amount you repay. If your goal is minimising the overall cost, keeping the term as short as you can comfortably afford usually serves you better.

Setting up a secured loan involves costs that need factoring into any saving you're expecting. These reduce your net benefit if you pay them upfront, or add to your total borrowing if they're added to the loan.

You should also check whether your existing debts carry early repayment charges. Fixed-rate personal loans, car finance agreements, and some credit cards can charge a fee for settling early, and this comes straight off any saving you're expecting from consolidating. Ask your current lenders for an up-to-date settlement figure before you commit to anything.

You don't need to wait for a full application to get a genuine sense of whether consolidating is likely to save you money. Working through the steps below gives you a like-for-like comparison.

Consolidating isn't automatically the cheaper option. In some situations, it can end up costing you more than leaving your debts as they are.

A lower total cost isn't the only reason people choose to consolidate. Even when the financial saving is modest, or the outcome is roughly cost-neutral, some borrowers still find it worthwhile for other reasons.

Managing one payment to one lender instead of juggling several due dates and providers can make budgeting considerably easier, and reduces the risk of missing a payment by mistake. Consistently keeping up with one consolidated payment, rather than several accounts, can also help your credit profile over time, particularly if consolidating brings your overall credit utilisation down.

These benefits are real, but they're not guaranteed, and they don't apply to everyone. If simplifying your finances matters more to you than the numbers alone, it's still worth checking the total cost so you go in with a clear picture rather than assuming it will automatically be cheaper.

Consolidating unsecured debt into a loan secured against your home changes the nature of that debt, and it's worth understanding the risk before you go ahead. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. Credit card debt, while often expensive, doesn't carry that same risk to your property.

You may end up paying more overall

As covered above, extending your term can increase your total cost even when your new rate is lower. Go in with a clear view of the total repayable, not just the change to your monthly payment.

Early repayment charges may apply to your new loan too

Most secured loans include early repayment charges during an initial period, often several years. If you think you might clear the loan early, for example from an inheritance or a property sale, check how this could affect you before committing.

It doesn't fix the underlying spending

Clearing your credit cards through consolidation frees up that credit again. Without addressing what caused the debt to build up, some people end up borrowing on the cleared cards again while still repaying the consolidation loan.

If you're not sure whether consolidating is the right move for you, free and independent guidance is available from MoneyHelper on 0800 138 7777, as well as from charities such as StepChange and Citizens Advice. They can talk through your options, including alternatives like a debt management plan, without any tie to a particular lender.