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What Debts Can I Include in a Debt Consolidation Loan?

Claire Matthews

Financial Advisor, MoneyBeagle

What Debts Can I Include in a Debt Consolidation Loan?

There are many factors to consider before you decide to pursue a debt consolidation loan. If your debt is overwhelming and you are struggling to make just the minimum monthly payments, a debt consolidation loan in itself may not be the solution. While it can help, you should also be prepared to make changes to your budget so you can live on just your income alone, with no help from credit cards.

A debt consolidation loan can help you overcome your debt, but only if it is used responsibly. Most people who use debt consolidation loans successfully have a loan with a relatively low interest rate, and they make their monthly payments on-time throughout the duration of the loan. To ensure success, some pay more than the minimum monthly payment so they can repay the debt before the loan term, which saves them money on interest charges.

What is a Debt Consolidation Loan?

If you have multiple debts, a debt consolidation loan may be a good option to consider. Between multiple credit cards, medical bills, or other personal loans or cash advance loans, you may be paying quite a few bills each month. A debt consolidation loan allows you to combine certain debts into one, so you only have one monthly payment. Some debt consolidation loans have different requirements for the accounts you consolidate.

Certain debt consolidation lenders may require you to close all your credit card accounts or other debt accounts, which can negatively affect your credit score. Other lenders may allow you to keep your accounts open, so it is important to know which type of lender or what type of loan agreement you are signing up for. Another key aspect is to use a reputable lender to avoid being scammed out of additional money.

There are a variety of debt consolidation lenders online, and each of them have varying details and eligibility requirements. Typically, the lower your credit score, the higher your annual percentage rate (APR) will be. Most loans also come with a standard loan fee based on a certain percentage of the loan amount. The term of the loan may also vary.

If you already have a low credit score, you should be very cautious of the interest rate you will be charged on a loan, as it may not be lower than the rates on your credit cards.

What Debts can be Included in a Debt Consolidation Loan?

Credit cards, medical bills, personal loans, cash advance or payday loans can all be included in a debt consolidation loan. Federal student loans cannot be included although in most cases, private student loans can be included. Some utility or cell phone bills may also be included in a debt consolidation loan.

If you have child support or alimony payments, those cannot be considered as debt within a consolidation loan in most cases. If you owe back child support or are behind on alimony payments, you may want to seek the assistance of a credit counselor to find the best debt consolidation option for your specific situation.

It is important to use a reputable lender so you can ask questions about what specific debts you have that may be included in this type of loan. Most debt consolidation loans only apply to unsecured debt, which is debt that is not secured by any assets or property as collateral for the loan.  Secured debt, such as an auto loan or home mortgage loan, uses the property as collateral, so if you default on the loan, the lender will assume ownership of your car or house.

How to Make a Debt Consolidation Loan Work for You

So now you know what debts you can include in a debt consolidation loan.  The next step is to determine how you could benefit from consolidating your debt. Debt consolidation loans are not always the best solution to overcome your debt. In fact, some borrowers end up in a worse situation than before they took out the debt consolidation loan.

Analyze Your Expenses

To begin, you should make a list of all your debts and expenses. Organize them by interest rate, from highest to lowest. The debts with the highest interest rates (typically credit card debts) will be at the top of your list. Highlight the debts you could consolidate in a loan, and calculate the current amount you pay toward those debts each month.

The only way a debt consolidation loan will work for you is if the monthly payments are lower than the current amount you are paying toward your debts.  The interest rate of the loan must also be lower than the interest rates you are currently being charged on your debts. If the monthly payments are higher and the interest rate is not significantly lower, then you may end up paying back more money than you currently owe in the long term.

Be Aware of the Loan Details

There are a few variations of debt consolidation loans to consider. Some lenders may require you to close all your accounts once the loan pays them off.  This can damage your credit score. Other lenders may allow you to keep those lines of credit open, which can actually increase your credit score, because you have open lines of credit. For some borrowers, this can backfire because they continue to use their credit cards, thus defeating the purpose of eliminating or reducing their debt.

In addition to the interest rate, most debt consolidation lenders also charge a loan fee, that is usually a certain percentage of the loan amount. You should also consider the loan term and how long it will take you to repay the loan.

Make Your Monthly Payments on Time

One of the worst situations you can be in is to default on a debt consolidation loan. Before signing the loan agreement, you should have a pre-determined plan to make the monthly payments and to live off your income without using credit cards or other lines of credit with high interest rates. Just one late payment can snowball into loan default, collections agencies, and court hearings.

If you decide to pursue a debt consolidation loan, you should be prepared to cut back on additional expenses to avoid falling back into debt or using credit cards for unnecessary expenses.

Develop a Budget

You have already laid out your expenses and your debts. Go back and look at the expenses you may be able to reduce by making small lifestyle changes. For example, you can save on your food bill by reducing or eliminating eating out, clipping coupons or buying off-brand products. In many states, you can recycle aluminum or glass and get money in return.

Making small changes can add up to a significant amount of money. Saving money now may help you when faced with unexpected expenses, so you can continue to make your debt consolidation loan payments to avoid default. You may want to consider increasing your income by picking up a part-time job or finding another source of income.

Increase Your Income

If you can reduce your expenses and increase your income, you may be able to build up a savings or emergency fund, in addition to paying more than the minimum monthly payment on your loan.  The faster you repay the loan, the less you will be paying in interest charges over time. If you are dedicated to overcoming your debt and living off only your income, then you can use a debt consolidation loan to your advantage.

There are many opportunities to make some extra cash, and you can find the best fit for your schedule.  Perhaps you can offer babysitting or dog-walking services, lawn care, or maybe you prefer to work online for sites such as Upwork or Clickworker. If you do a little research, you should be able to find something that works for you and that you enjoy.

Stick to the Plan

Overcoming your debt is a long process. It will take dedication and perseverance, but it can be done. It is up to you to decide to be responsible with your spending. Once you have a budget or an expense plan, stick to it. When you are debt-free, it will be well worth the sacrifice. There may be some times you can’t save as much as you planned or you are faced with unexpected expenses, and that’s ok. If you stick to your budget and continue to focus on your finances, you can make a debt consolidation loan work to eliminate your unsecured debt.

Defaulting on a Debt Consolidation Loan

Because debt consolidation loans are unsecured loans, the lender will go to great lengths to get the money you owe. If you default on this type of loan, it will severely damage your finances for years to come. A debt consolidation loan should not be taken lightly. If you default, you could be facing court appearances and court costs in addition to the loan amount and late fees and charges.

If the court makes a judgment against you, they can garnish up to 25% of your wages, or place a lien on your house, which means if you sell it, you will owe court any money you earn from the sale. This is why it is so important to understand the monthly payment amounts before applying for a loan.

Debt Management Plans

A debt management plan is an alternative option to a debt consolidation loan. Some financial experts and credit counselors tend to prefer debt management plans as opposed to debt consolidation loans.

Many debt management plan lenders are non-profit organizations who also offer credit counseling services. The credit counselor will help you analyze your finances to determine if a debt management plan is the best option for you. In most cases, the agency or organization negotiates with creditors on your behalf to reduce your interest rate, lower your balance or waive your late fees to make your monthly payments more affordable.

Instead of paying your creditors directly, you make payments to the debt management agency and they make the payments to your accounts. A debt management plan may negatively affect your credit score, although it depends on the specific details of your accounts, like if they are in default or collections.

Make the Right Choice for Your Finances

If you are faced with multiple credit card payments each month or you are drowning in medical bills or other debt, there is nothing wrong with doing some research to find options that will allow you some breathing room. A debt consolidation loan is not a magical solution that will automatically fix your financial situation, but if used responsibly, it can help.

Regardless of if you choose a debt consolidation loan, debt management or another debt reduction or elimination option, it is going to take time. Most debt consolidation loans take 3 to 5 years to pay off, and the same applies to debt management plans. You didn’t get into debt overnight, and you can’t get out of it overnight, either. It will take patience and dedication to overcome your debt, but it can be done.

Before you sign for a debt consolidation loan, be sure to understand the details of the loan. You should know the interest rate, loan fee, loan term and monthly payment amount. In addition, you should understand any late payment fees or grace periods. A debt consolidation loan will only be successful if it saves you money by reducing your monthly payments and interest rates.

A credit counselor can provide assistance if you are not sure which is the best option for you to eliminate or reduce your debt by consolidating. They will look at your personal financial situation and provide recommendations for the services that would benefit you the most. As with any loan, be sure to research the lender. Any debt consolidation lender should be licensed or be registered with the Better Business Bureau (BBB), or both. One of the worst things you can do is fall for a scam, because you will lose money and possibly damage your credit score even further.



Claire Matthews

Claire Matthews

Financial Advisor, MoneyBeagle

Claire is a noted financial writer and author of hundreds of articles about personal and business finance. Before getting her MBA, she graduated with a BS in Economics. Her coursework focused on the different ways that debt, debt structure, and debt restructuring affect micro and macro-economic issues.

Upon graduation, she took a job at an investment bank that worked with municipal and county governments to help them reorganize and structure their debt so they could continue to provide essential city services.

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