How does debt consolidation work?
Debt Consolidation simply involves taking out a single loan which is larger than the total of all your other unsecured creditor debts. In order to consolidate your debt, you would utilise the larger loan to repay all the debts.
Advantages of debt consolidation
- You can simplify your separate creditor repayments into a single, lump sum made to one creditor.
- You only have to interact with one creditor rather than many making it far easier to manage your debt.
- Depending on your situation and your credit history, you might be able to reduce your monthly repayments by 75%, though you will pay more in the long term on added interest.
- Can extend your loan term to a more suitable length of time for your financial situation. This can provide you with enough time to recover financially and address your debt in a more affordable manner.
- You could consolidate your debt to a lower interest rate than the average of your other loans if your current liabilities are mainly comprised of high interest debts such as payday loans.
Disadvantages of debt consolidation
- Will increase the size of your debt in the long term if you decide to choose a new loan with a longer loan term. This is because whilst your monthly repayments will be reduced, you will incur more interest charges and this will mean you will likely end up paying more in the long term than the amount you consolidated your debt for in the first place.
- You might be offered a loan with a counter-productively high interest rate if you have a poor credit rating.
- Does not solve your debt problems, it simply gives you the opportunity to simply repayment and have more time to recover financially.
How do I get a debt consolidation loan?
In order to get a debt consolidation loan, you will need to locate a lender who distributes larger sized loans. Banks and building societies usually offer personal loans which can be used for consolidatory purposes though there are also debt consolidation companies you can access for this purpose.
Make sure you stay away from high interest lenders like payday or logbook loan lenders, because using loans such as these will simply expand the size of your debt and your difficulties, rather than do anything meaningful to help you.
Is debt consolidation the right option for me?
Just as it sounds, a Debt Consolidation Loan works by taking out a single loan which then pays off all of your other debts, so that you are left with one single manageable debt. This way you end up paying just one monthly repayment instead of several, which can make life easier. This can often mean paying less on a monthly basis, but overall you will typically end up paying around the same, or slightly more, than you would have before consolidating your debt. Therefore, Debt Consolidation is more useful for simplifying and organizing your debt repayments, rather than reducing them.
Is Debt Consolidation the right solution for me?
Debt Consolidation can be ideal for those who struggle with being organised. However, keep in mind that you must exert a certain degree of self-discipline, as taking out a Debt Consolidation Loan can potentially enable you to take out additional debt. For example, if you use a consolidation loan to clear your credit cards, then those credit cards will be available to rack up debt again, unless you make a conscious decision not to.
If you are currently unable to pay back the debt you currently have, then it is unlikely that a Debt Consolidation Loan is going to improve your situation as it will not significantly reduce your debt and could actually end up increasing it.