Debt Consolidation

If you owe money to a number of creditors, debt consolidation could ease the process of repaying what you owe and provide a clear line of sight to a debt-free future.

What is debt consolidation?

Debt consolidation enables you to combine all of your outstanding debts into one, lower monthly repayment. This usually results in a more manageable loan, either an unsecured personal loan or one secured against an asset such as your home.

Dealing with multiple creditors is a stressful business and with more than one company to repay and several Direct Debits to manage, instalments can be missed or accidentally cancelled, making subsequent legal action and damages to your credit rating a very real prospect.

Is debt consolidation right for me?

As tempting as it may sound, it is important to bear in mind that by heading down the debt consolidation route, you will be increasing the time in which it takes to pay the debt back and probably pay more interest in total.

However, debt consolidation can be a very convenient and sensible tactic if your circumstances reflect one or both of the following:

• You know you can afford to repay your creditors, providing you can reduce your monthly repayments and extend the repayment term;
• You’ve got a significant number of relatively small debts with high interest rates, such as credit cards

If your situation is more serious, you may wish to instead consider an IVA or bankruptcy.

Advantages of debt consolidation

You’ll be able to budget far more easily. If you’ve got several Direct Debits heading out of your account every month (some of which may vary in value from month to month), keeping track of your outgoings can be incredibly tricky. With debt consolidation, you’ll have one fixed amount to pay every month, so you’ll be able to forecast your income and expenditure with far greater accuracy

Your monthly debt consolidation payment will be less than the total of those it replaces due to a lower interest rate and longer loan period

Collection calls will stop. If you’ve fallen into arrears, you’ll know how stressful it can be dealing with creditors. Debt consolidation involves repaying existing creditors with a new loan.

Although it isn’t guaranteed, debt consolidation can assist with your credit rating. By combining all debts into one repayment – and by keeping on top of it – your credit score will begin to repair itself

Disadvantages of debt consolidation

• If you genuinely can’t afford to repay all of your debts, debt consolidation will only add to your woes – it is an additional loan, after all
• Lower interest rates are attractive, but they’ll nearly always come with a longer loan period, so you’ll be in debt for longer and the overall cost will be greater
• If you choose to secure your debt consolidation loan against your property, you will be in risk of losing your home if you fall into arrears
• If you would rather use an unsecured loan to consolidate your debts, bear in mind that you’ll need a good credit rating to stand a chance of being accepted

Conclusion

Debt consolidation should always be considered a type of loan in its own right. It will lengthen the time you’ll be saddled with the debt and cost more overall. For many, however, it can be the most sensible route towards being debt-free and enable them to rebuild their credit score.

You’ll need great discipline in order to benefit from debt consolidation; a lower monthly repayment can lead many into a false sense of security, prompting them to start borrowing again after consolidation. Don’t fall into that trap if you decide to consolidate your existing debts!