What debts can I consolidate?

What debts can I consolidate? It`s a common question - but it`s also a misleading one. The type of debt you`re thinking of consolidating isn`t really the question. What counts is why you`re looking to pay it off with a consolidation loan/mortgage.

The two main benefits of debt consolidation are greater affordability and greater simplicity:

Affordability: Debt consolidation loans (especially if they`re secured against property) tend to come with much lower interest rates than many other forms of credit (especially credit such as store cards and credit cards). Plus, consolidating debts also gives the borrower a chance to reassess their financial situation and arrange to repay their debt at a rate they can afford - by repaying it over a longer time period, they can reduce the size of their monthly payments (although this can add to the overall cost, as the debt will be attracting interest for longer).

Simplicity: Repaying one debt is simpler than repaying multiple debts. This means the borrower will need to spend less time and effort keeping up with their debt repayments, but that`s not really the biggest benefit. It also means they`ll be less likely to make their payments late or forget to make them at all - either of which can lead to charges, damage to their credit rating, and possible legal action from their lenders.

So, in terms of cost, it`s probably well worth consolidating a store card debt if it`s charging an interest rate of 27%, but consolidating an overdraft that`s only charging 1.5% is unlikely to be worthwhile.

Don`t forget:

Some forms of credit (such as mortgages) may come with an ERC (Early Repayment Charge) - a charge you`ll have to pay if you repay the debt earlier than you originally agreed. It`s important to calculate that ERC and figure out how much you`d save by consolidating that debt, so you can see if you`d actually save money by paying off this debt with your consolidation loan.

When a lender gives you a loan of any kind, their main concern is your ability to repay it. The fact that you`re using it to consolidate debts is not hugely important to them - and nor is the kind of debt you`re using that loan to consolidate. You need to think about the issues of affordability and simplicity, and if you`re not sure whether or not you should pay off a particular debt with your loan, it`s a good idea to talk to a professional debt adviser about it before you commit yourself to anything.

In summary, the question should be `What debts should I consolidate?`, rather than `What debts can I consolidate?`.