Debt consolidation - advantages and disadvantages

One major purpose of debt consolidation is to make your finances simpler. Having multiple debts, as many people do these days, can be a bit of hassle.

Imagine you had three debts - an overdraft, a credit card and a store card.

It is likely that you are being charged different rates of interest on each of these debts. It's also likely you owe different amounts on each debt. Both of these factors can make it difficult to have a clear idea of when you will be debt free.

If you're only making the minimum payments, a lot more interest will be added to that debt before you eventually pay it off.

Also, it can be difficult to budget for lots of different debt payments, especially if they leave your account at different stages of the month. One solution is to arrange for all your debt payments to leave your account on the same day.

Another solution is to convert all your debts into one debt - with a debt consolidation loan, you'll only have to make one payment per month.

The advantages of a debt consolidation loan

You are likely to find it simpler to make one debt payment every month, compared with many different ones. Dealing with one creditor can also be simpler than talking to multiple creditors - especially if you have had difficulties with a creditor in the past.

Working out your monthly budget may become a fair bit easier if you have a clear idea of the monthly amount that will be debited and when. You should also be given a clear idea of the date you will be debt free. That can be a real focus to work towards, instead of feeling like your debts will hang around forever.

If you are able to secure a debt consolidation loan with a lower interest rate than your previous debts, that's even better! Not only will you have simpler finances; your debt will be growing more slowly.

You could also spread your debt consolidation loan repayments over a longer period. That should reduce your monthly payments. Although, be aware that you'll pay more in interest overall if you do this.

It's advisable to see what you would have paid without the debt consolidation loan and work out whether you really want the benefit of lower monthly payments if it means paying more interest in the long run.

The disadvantages of a debt consolidation loan

It is not always possible to find a debt consolidation loan you'll be accepted for. It really depends on how much you need to borrow and your credit history, as well as other factors, such as the availability of credit at the moment.

Be aware that having many debt consolidation loan applications in a row does not look good on your credit file and could affect your chances of obtaining reasonably priced credit for the next few years.

Debt consolidation and debt consolidation loans aren't really appropriate for every situation - for example, if you are a seasonal worker, or your income is erratic, you might not want the commitment of regular repayments.

A debt consolidation is only really suitable for people who want to make their finances simpler and can commit to making loan repayments. If you're having debt troubles, such as missing payments or falling into arrears, you might want to consider a debt management plan or another debt solution.

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