A debt consolidation loan is a new loan taken out by an individual in order to repay all their unsecured creditors in one go. Once they have repaid their unsecured debts, the borrower will owe nothing to their ‘old’ creditors. Instead they will start making monthly repayments to the provider of their consolidation loan.

Generally, debt consolidation loans are suitable for people who are looking to simplify their finances and/or reduce their monthly outgoings.

The individual may be able to lower their monthly payments by slowing down the rate at which they repay the debt. However, this means they will be repaying for longer, which could mean they might repay more overall, due to interest (unless the interest rate on the debt consolidation loan is significantly lower than the interest rates on the original debts).

A debt consolidation loan can come with various benefits. For example, the borrower will have one single monthly payment to make, rather than several - which can reduce the risk of missing payments.

Debt consolidation loans would not be suitable for some people - for example, people who can’t afford to repay the loan within a reasonable timeframe or can’t commit to making repayments because they don’t have a reliable income.

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