Credit confidence: Debt consolidation using a personal loan

Following steep rises in the cost of living, money is tighter than ever. With this in mind, we’ve taken a look at how you can manage your debt and whether a loan might be the right choice for you.

Updated 1 August 2022  | 5 mins read

The cost of living crisis has hit households across the UK, leaving us with tighter budgets than ever. As a result, many have turned to additional borrowing to cope with rising costs. If you are someone whose debt has increased during these tough times, you are not alone. Household debt across the UK reached £1,767.1 billion in January 2022, an increase of £62.2 billion from one year prior, which equates to an extra £1,176.40 per UK adult over the year.[1]

It stands to reason that the nation is experiencing increased household debt. Inflation, interest and the price of everyday items have all risen while wages have failed to grow at the same rate. So, if you are struggling with your finances, it’s important to recognise that these factors are out of your control and there is no shame in needing help in these unprecedented times.

Our research shows that over a third (36%) of adults are thinking about consolidating their debts[2]. With this in mind, we discuss whether a loan may be the right choice for you.

The difference between loans and credit cards

Borrowing via a loan and borrowing on a credit card differ because of how people usually use them. Typically, a credit card is used for smaller spending - this can encompass a range of everyday activities like food shopping and regular bills, or less frequent usage such as booking flights or paying for an unexpected car breakdown. Loans are more often used for larger, one-off purchases such as buying a car or paying for home renovations.

While credit card users benefit from the flexibility of being able to borrow money as and when they need it, this can be costly if you can’t afford to pay the card off each month. Loans, on the other hand, offer a more rigid method of borrowing that typically provide lower interest rates in comparison to credit cards. Unlike a credit card, the amount you borrow on your loan is paid out once and you work to repay it, rather than a constant back and forth line of credit.

What is debt consolidation?

Debt consolidation is a way of managing debts by taking out a loan to pay off outstanding credit. This could be from credit cards, smaller loans or items purchased on finance. This method of establishing a more manageable repayment plan for multiple debts has been used by almost one in five (17%) UK adults.[2] This number could begin to increase as 16% of Brits said their view of debt consolidation had changed because of the cost of living crisis.

If you’re looking to manage your credit and are in a place where you are no longer going to be accruing any more debt, you can use either a credit card or a loan that allows you to put all of your borrowings into one place. For credit cards, this is called a balance transfer and is typically more suitable if you have a smaller amount of debt. If you have poor credit, however, a balance transfer may not be the best route as many require a cash deposit which could be put to better use paying off your debt.

Credit cards and loans, in general, are not always going to be accepted, and so any deals will only be on the basis that they are offered to you. 0% APR (annual percentage rate) deals often only apply for one year (although some balance transfers offer up to 34 months interest-free), requiring you to take on an agreed interest rate to pay back as well as your debt. Using a personal loan is the other method of debt consolidation that we have taken a comprehensive look at.

Using a personal loan for debt consolidation

When you’re in a position to stop borrowing and start paying back your debts, taking out a loan might seem counterintuitive. However, when all your debts are in different places, it can be hard to keep track of every outgoing, and trying to account for varying interest rates and deadlines can be an added struggle.

There are a number of factors to consider when deciding whether to consolidate your debts into one loan. For example, you’ll want to make sure that you get a lower interest rate than you currently have. What you’ll be able to borrow will also be determined by the lender based on your credit rating and financial circumstances, so it’s worth conducting a ‘soft search’ before you apply to see what rates and deals you’ll likely qualify for.

Our research found that the average loan taken out was £10,582.92.[2] Using this to represent a typical amount of debt, we compared how much it would cost to pay this off using a personal loan on a five-year plan versus with a credit card on a three-year plan. Note that these figures are demonstrative and any debt repayment would be subject to available APRs.

Amount Term APR Monthly payment Interest paid Total amount payable
Personal loan £10,582.92 5 years 4.00% £195 £1,111 £11,700
Credit card £10,582.92 3 years 16.00% £372 £2,811 £13,392

Based on the above interest rates, we calculated that debt consolidation using a loan with a longer repayment period would result in paying back £1692 less than using a regular credit card on a three-year repayment term. The chart shows lower interest rates on a personal loan, as it assumes that you will benefit from lower rates when borrowing over an extended period, in this case, five years instead of three.

It’s always best to research and compare deals available on both credit cards and loans before committing to a repayment plan. Credit cards used for the purpose of balance transfers often have 0% APR offers for a short period of time (typically one year), whereas personal loans may charge higher interest rates during a shorter term.

So, if you believe you can repay the amount you borrowed within that time, or are confident to switch to another provider, a credit card may be the better option for you. You should also consider that you might not know your credit card limit prior to being accepted, which can make debt consolidation tricky if it doesn’t cover the amount you need. Before consolidating your debts, you must be sure that you are in a position to stop borrowing and are financially able to pay back the minimum repayments on your credit agreement.

Talking about debt

According to our latest research, a staggering 46% of UK adults would not openly discuss debt consolidation with their family and friends.[2] Although money issues, and particularly debt, can feel like an uncomfortable topic to raise with family and friends, there are many benefits to having open discussions around finance. If you’re worried about your debts, talking to someone can help to relieve pent-up stress and not leave you carrying the emotional burden alone. You may also gain helpful insight as those around you may have experienced similar problems.

Our report found that more than half (52%) of those aged 55 and over would not want to freely talk about debt consolidation. This number fell to just 43% and 41% of 18-34 and 35-54-year-olds respectively, suggesting that attitudes could be changing with the generations. If for any reason you are struggling to talk to someone about your financial worries, there are several services available that can help.

Spending a lot of your time occupied with financial concerns can sometimes lead to mental health issues. In this case, it may be worth speaking with your GP about counselling or other treatment. Mental Health UK has also created a Mental Health and Money Toolkit designed to help manage mental and financial wellbeing.

At GoCompare, we know that discussing debt can be difficult, so we’ve created this informative page to help you feel more confident about your options. However, if you are struggling with your finances seek out a professional service for help. Free advice is available from Step Change (the debt charity created by the National Debtline) or you can contact the Citizens Advice Bureau.

About this data

[1] The information on current national household debt was taken from a report by the Money Charity, which can be downloaded as a PDF here.

[2] To collect data for this report, we ran a YouGov Survey of 2,000 UK adults on the 17th June 2022. Respondents were selected at random across several demographics.