A debt consolidation loan is a consumer loan you use to close several existing debts at once, such as two loans and a used overdraft. Instead of several payments at different rates, you make one payment, usually at a lower rate. It pays off when the new rate is clearly lower and the term stays similar. If you only get a lower payment by stretching the repayment, you can end up paying more than before.
How does loan consolidation work?
You take out a new consumer loan for the total of the debts you want to close. The bank uses it to pay off the old loans and the overdraft, and from then on you make one payment. You usually do not need a special product; it is a regular consumer loan used to repay other obligations.
There are three advantages:
- a lower interest rate, if you are closing an expensive overdraft or older high-rate loans,
- one payment instead of several, which makes your costs easier to track,
- the overdraft available again for emergencies, as long as you do not spend it.
Example: Maja closes two loans and an overdraft
Maja has three debts:
| Debt | Balance | Interest rate | Monthly payment |
|---|---|---|---|
| Consumer loan A (3 years left) | €6,000 | 7.5% | €186.64 |
| Consumer loan B (2 years left) | €3,000 | 8.9% | €136.92 |
| Used overdraft | €2,000 | 10% | €16.67 (interest only) |
| Total | €11,000 | €340.22 |
The overdraft is the sneakiest. Maja only pays interest on it, while the €2,000 debt stays the same until she covers it from her salary.
If she closes everything with an €11,000 consumer loan at 5.95%, the median fixed consumer-loan rate of Slovenian banks in October 2026, the result depends on the term:
| New loan term | Monthly payment | Total interest |
|---|---|---|
| 3 years | €334.39 | €1,038 |
| 4 years | €258.08 | €1,388 |
| 5 years | €212.41 | €1,744 |
If Maja keeps her old debts, she pays about €1,605 interest over three years and the overdraft is still €2,000 in the red. With a new three-year loan she pays €1,038 interest and is debt-free after three years. The payment is almost the same, she saves about €570, and the overdraft is cleared.
Over five years the payment is €128 lower, but at €1,744 the interest is even higher than on her old debts. In that case she has bought a lower payment with a longer debt. That can make sense if the payment truly no longer fits her budget, but it is not a saving. Work out your own combination in the loan calculator.
Costs you need to add
The interest saving is not everything. Before deciding, also add up:
- the early repayment fee on the old loans. The bank can only charge it on fixed-rate loans, and the law caps it at 1% of the repaid principal, or 0.5% if less than a year is left. On Maja’s €9,000 of loans that is at most €90. Details are in the article on early loan repayment.
- the arrangement fee on the new loan, which is €0 at some banks and around 1 to 2% of the amount at others,
- loan insurance, if the bank requires it,
- a monthly account or package fee, if it is a condition for the lower rate.
The APR captures all of this. Compare the APR of the new loan with the rates on your old debts, not just the nominal rates. Where extra costs hide is covered in the article on hidden loan costs.
Will you get the loan?
For a consolidation loan the bank checks your credit capacity as for any loan. After all loan payments you must be left with at least €745 a month, and payments generally may not exceed half of your net income. More in the article on minimum living costs.
The good news is that the bank takes into account that you will close the old debts. If the new payment is lower than the sum of the old ones, your burden falls. Missed payments or a blocked account make approval harder. What you can do in that case is covered in the article on getting a loan when you are not creditworthy.
When consolidation does not pay off
- When the new rate is similar to the old ones. If you already have a loan at 5%, a new one at 5.5% does not improve it, however convenient one payment is.
- When you stretch the term only for a lower payment. As Maja’s example shows, a longer term can mean more interest than before.
- When the old loan is nearly repaid. On a loan ending in a few months the remaining interest is small, but the new loan’s costs are not.
- When you spend the overdraft again after paying it off. Then you have a new loan and an old overdraft debt. Lower the overdraft after repaying it.
- When it is a mortgage. A mortgage usually has a lower rate than a consumer loan, so you do not close it with a consumer loan.
The process in five steps
- Write down all debts: remaining balance, interest rate, monthly payment and date of the last payment.
- At the bank holding your old loans, check the early repayment fee.
- Compare offers in the consumer loan comparison and pick a term no longer than what is left on your loans.
- Calculate the total interest the old way and the new way. If the new total cost with all fees is lower, it pays off.
- After approval, check that the old loans are really closed, and lower or close the overdraft.
Conclusion
A debt consolidation loan makes sense when it closes pricier debts, especially an overdraft or older high-rate loans, while the term stays similar. You then save interest and get a single payment. If you only get a lower payment by stretching the term, it is a fix for a tight monthly budget, not a saving. Compare bank offers in the consumer loan comparison, and find the cheapest with the article on the cheapest consumer loan.
