What types of debt can I consolidate?

28 April 2009

If you have multiple debts and are looking to reduce your outgoings or simplify your finances, a debt consolidation loan could help you.

As well as consolidating your debts into one convenient monthly payment, a debt consolidation loan can also be repaid over a longer period than your original debts, reducing your monthly outgoings. This can make a big difference to your ability to repay your debts.

Which debts should I consolidate?

You can actually consolidate any form of debt, so long as you can borrow enough to do so.

But most people who take out a consolidation loan will be dealing with relatively small debts. Debt consolidation loans commonly cover personal loans, overdrafts and credit card debts that the borrower would like to make more manageable.

It is possible to consolidate larger debts, provided you can borrow enough. But if you are in a lot of debt, you should consider whether a debt consolidation loan is right for you.

If your repayments are going to be a big burden on your finances, or if you simply can`t see yourself repaying your debts within a reasonable period of time, then another debt solution may be more appropriate. You should always speak to a professional debt adviser before you make any decisions.

Be aware of the costs

Most people who consolidate their debts are looking to reduce their outgoings, but in some cases a debt consolidation loan can work out more expensive - in both the short term and the long term.

In the short term, early repayment charges (also known as exit fees) can add a significant amount to how much you will need to borrow. Some creditors charge these if you repay a debt earlier than agreed, to make up some of the interest they would have made if you had kept on with the original agreement.

Before you consolidate your debts, you should find out which (if any) of your lenders will charge exit fees, and calculate whether you are likely to save money overall or not.

In the longer term, consider how much interest you are likely to pay. If you are consolidating debts with a higher APR (Annual Percentage Rate) than your new debt consolidation loan, there`s a good chance you`ll save money overall. Likewise, if the interest rate on your debt consolidation loan is higher, you could pay more.

Finally, if you`re spreading out your repayments to reduce your monthly outgoings, be aware that you will pay more interest than if you had chosen a shorter repayment term. However, this often matters less than the month-to-month cost, since a debt consolidation loan is mainly aimed at reducing outgoings on a monthly basis.

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