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Is debt consolidation the right solution for me?

Debt consolidation can be a useful measure to utilise if you are someone who has multiple creditor debts that you are currently defaulting on. This is because you can use a debt consolidation loan to clear all of your smaller creditor debts and prevent being charged anymore from late and interest charges incurred by going into arrears.

However, for certain people using a debt consolidation loan can actually be counter-productive to their financial problems and will mean they end up spending more in the long-term than they would have done before consolidating their debt. As such, it is important that you keep a number of things in mind before concretely deciding on consolidating your debt, because the choice you make will have a huge impact on the way you conduct your financial affairs thereafter.

The following page will clearly outline which things you should carefully consider before obtaining a debt consolidation loan, as well as an indication of which circumstances warrant its acquisition.

Things to consider before consolidating your debt

Before making your final decision to consolidate your debt, you should take the following into consideration so you can ascertain whether it will truly be beneficial to your situation:

  1. What are the causes of your financial struggles at present? If you are someone who has accumulated numerous creditor debts because you can’t afford your cost of living on your current income, then the likelihood is that a debt consolidation loan will not be beneficial to your situation. This is because you will simply take out the larger loan to clear off your smaller debts and then be faced with the same problems as before when it comes to making your monthly repayments to your debt consolidation loan provider. As such, if you have a low income or are currently unemployed, it is strongly advised you avoid acquiring a debt consolidation loan, because it will simply provide a short term fix to your problems and likely escalate them later on down the line.
  2. Do the math and figure out whether consolidating your debt makes financial sense. Look at your current liabilities, the amount you currently spend on repayments each month and the interest rates attached to each loan. You can then compare these against different debt consolidation loans on the market and determine whether your monthly repayments will be more affordable with a single, larger lump sum of debt, or under current circumstances.
  3. What reason are you using the debt consolidation loan for? If you are someone who is simply looking for short term financial relief from your creditor debts, then a debt consolidation loan could be a useful way of reducing your monthly repayments and extending your loan term so you have time to improve your financial situation. However, if you are unemployed or do not envisage your income picking up anytime soon, then you might want to consider another debt solution. Similarly, you may be someone being subjected to numerous phone calls and letters from your respective creditors every day chasing you up for repayment of your debts. A debt consolidation loan might be a good way to end this harassment at the hands of your lenders, as you will only need to interact and make payments to a single creditor. Ultimately, you will need to analyse the reasons why you are seeking to use a debt consolidation loan before making a value judgement about its worth.

How can a debt consolidation loan help me with my financial difficulties?

Below are the most common reasons why people usually take out debt consolidation loans, so you can determine whether utilising one is beneficial to your situation:

Pay their debt off quicker

If you are someone who has a stable income but have simply taken on more debts then you can manage, then a debt consolidation loan could be a great way to pay your debt off quicker and stop your outstanding debt balance rising through late charges. You could make one lump sum overpayment each month to address all your debt and then save a great deal on interest charges in the long term by repaying your debt quicker.

The conditions of your current debts may necessitate that you cannot make additional payments. In cases such as these, repaying your current debt with a new loan with a smaller repayment term attains the same providing that the new rate is equivalent or close to your existing debt.

I want to save money and pay off my debt faster

Consolidate their debt at a lower interest rate

If you decide to consolidate your debt with a larger loan at a lower interest rate, you could save a lot of money. This can be achieved by choosing a debt consolidation loan with the same repayment term as your current liabilities- or preferably shorter- in order to optimise your savings.

Using a debt consolidation loan for this purpose can be supremely useful is you have a number of debts with high borrowing costs at the moment, such as an assortment of payday loans, credit cards or overdrafts which usually come with larger interest rates than a number of debt consolidation loans on the market.

However, you should take into consideration that if you have a poor credit rating, it will be extremely difficult to attain a debt consolidation loan with a low interest rate because lenders are apprehensive to lend to high risk borrowers without attaching high borrowing costs to their loans.

Lengthen the term of their debt

One of the big advantages of paying all of your debts with a single, larger loan is that you will be able to choose an offering which has a longer repayment term than you are enjoying at present. This should grant you more time to improve your financial situation and get yourself into a position where you can start making larger payments again. However, you should keep in mind that this will likely increase the amount you repay on your debts in the long term as extending your term will mean that you end up paying more on interest.

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