A debt consolidation loan is a single loan taken out to repay several existing debts, usually credit cards and overdrafts. Instead of several payments going out at different times with different interest rates, the borrower makes one fixed monthly repayment to one lender over a set term. Updraft, a UK lender authorised by the Financial Conduct Authority, helps people pay off credit card debt in this way, combining card and overdraft balances into one fixed-rate loan with a known end date.
The process is straightforward. A lender assesses an application, usually with a credit check and an affordability assessment based on actual income and spending. If approved, the loan money is either paid directly to the card providers so the balances are cleared, or sent to the borrower's bank account to settle the debts themselves. Direct settlement matters: if the money sits in the borrower's account and the cards are not actually paid off, the borrower can end up with both the loan and the old balances.
Once the cards are cleared, the borrower owes only the loan. Typical consolidation loans in the UK run from £1,000 to £25,000 over one to five years. The rate is fixed for the whole term, so the monthly repayment does not change, and there is a date on which the debt ends.
The reason consolidation often saves money is the difference in rates. Credit card interest commonly sits between 20% and 30% APR, and arranged overdrafts can run at close to 40% EAR. A personal loan at a lower fixed rate, with the arrangement fee included in the total amount repayable, can cost less overall than the same balance left on cards, provided the cards are actually cleared and not used to build new balances.
Minimum payments are the other half of the story. Card minimums are set as a small percentage of the balance, so much of the payment goes to interest rather than reducing what is owed. A fixed repayment on a fixed term forces the balance down every month, which is why a loan can clear a debt faster than minimum payments would.
Not every consolidation saves money. The total amount repayable over the term, including any fees, should be compared with what the existing debts would cost if left as they are. A longer term can lower the monthly payment while raising the total interest, so the trade-off should be deliberate. Early repayment charges, if any, are worth knowing about, as is whether the rate shown before applying is confirmed or estimated. A soft search, which does not affect the credit file, shows eligibility and rate before a full application.
Consolidation also only addresses existing balances. If spending continues after the cards are cleared, the borrower can end up with new card debt alongside the loan. People whose situation is more serious than high card balances, such as missed payments or no regular income, are generally better served by debt advice charities such as StepChange, National Debtline or Citizens Advice.
Suppose someone has three cards: £2,000 at 24% APR, £1,500 at 29% APR, and £1,500 at 19% APR, and pays roughly the minimum on each. The balances shrink slowly because most of each payment covers interest. A £5,000 consolidation loan at a lower fixed rate over five years replaces all three with one payment. On approval, the money is paid to the card providers, the balances reach zero, and the interest that would have accrued on the cards stops. The borrower pays one lender, one amount, on one date each month, until the loan's end date.
That is the whole idea: see what you owe, see what it is costing you, then pay it off faster, with the arithmetic of the new loan shown before anything is signed.