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What type of debts can you include in debt consolidation?

A debt consolidation loan can help you to make your debt more manageable. It helps you to simplify your finances, reduce your monthly outgoings and, often, reduces the interest rate that you are paying on your debts.

If you are considering debt consolidation, you may be wondering what debts you can consolidate. There are lots of different types of debt and you may have various debts that you are thinking of consolidating. Our guide explains what a debt consolidation loan is and what types of debt you can include.

What is a debt consolidation loan?

A debt consolidation loan is a new loan designed to clear your existing debts. Once you have repaid your existing debts you will make one single monthly payment to your new lender.

As well as simplifying your finances, 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. And, 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, you can save money.

Bear in mind that you may end up paying more interest overall as you will pay back the debt over a longer period. In addition, it may take you longer to become debt free.

What type of debts can I consolidate?

Generally speaking, a debt consolidation loan does not limit which debts you can and can`t consolidate. This means that you can use a debt consolidation loan to repay:

  • Credit or charge cards
  • Unsecured personal loans
  • Store cards
  • Catalogues
  • Hire purchase agreements
  • Existing debt consolidation or secured loans
  • Car loans
  • Overdrafts

While a debt consolidation loan will allow you to repay a range of debts, other types of debt consolidation program may be more restrictive. For example, a mortgage, student loan, rent, utility bills, child maintenance payments, court fines, and taxes are considered ‘priority’ debts. These items usually cannot be included in a formal debt consolidation program.

Beware of penalties for consolidating your unsecured debts

When repaying debts with a debt consolidation loan, it is important that you check the terms of your existing debts. As long as you are allowed to make a final payment that settles the whole debt, you can normally consolidate it - whether the debt is secured or unsecured.

You should remember that when you first borrowed the money, you may have agreed to specific terms that involved repaying the full amount of the debt, plus interest. Since interest is usually calculated on either a monthly or daily basis, repaying your debt early will mean that you will not pay a certain amount of the interest that your lender will have been expecting.

This means that some lenders may charge an `early repayment charge` if you want to repay the debt in full with the proceeds of a debt consolidation loan. This will sometimes be charged as a flat fee, or it might be calculated as a percentage of the interest the lender was expecting.

This fee can add a lot to the overall amount that you will pay to settle the debt. You should therefore make sure that you factor this in when deciding how much to borrow through your debt consolidation loan.

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