What types of debt can I consolidate?

26 June2009

By simplifying your finances and enabling you to reduce your outgoings, a debt consolidation loan can help you to make your debt more manageable.

Debt consolidation has helped a lot of people over the years. However, as with any debt solution, there are a number of things you should consider before taking out a debt consolidation loan.

Explaining debt consolidation loans

In short, a debt consolidation loan is a new loan designed to clear your existing debts, after which you will make single monthly payments to your new lender.

As well as simplifying your finances in this way, a debt consolidation loan can allow you to reduce your monthly outgoings by spreading your repayments out over a longer period than your original debts. However, because you would also be paying interest for longer, this would often mean you pay more overall.

That said, if the interest rate on your debt consolidation loan is lower than the interest rates on some (or all) of the debts you are consolidating, it is quite possible to save money overall as well as on a monthly basis.

Is there a limit on the type of debts I can consolidate?

A debt consolidation loan does not, in itself, limit which debts you can and can`t consolidate. So long as the terms on your original debts allow you to make a final payment that settles the whole debt, it doesn`t matter whether the debt is secured or unsecured.

However, keep in mind that when you first borrowed the money, you may have agreed to specific terms that involved repaying the full amount, plus interest. Since interest is usually calculated on either a monthly or daily basis, repaying your debt early will mean you will not pay a certain amount of the interest that your lender will have been expecting - and this can come with consequences.

Some lenders may charge an `early repayment charge` (also known as an `early settlement fee`). This will sometimes be charged as a flat fee, or it might be calculated as a percentage.

This fee can add a lot to the overall amount you`ll pay, meaning you may have to take out a bigger debt consolidation loan than you expected - and that can discourage some people from consolidating these debts. However, due to the way a debt consolidation loan can be spread out, you may find that it doesn`t add too much to your monthly loan repayments.

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