Debt Consolidation is often the first thing that people consider when they experience debt problems. Consolidating debts as it is understood in the UK is basically the process of taking out one large loan to pay off all your other debts, leaving you with only one payment to think about, which is usually a smaller amount that your combined debts were. Debt consolidation is also frequently used in the US in particular to refer to the use of debt management plans. This article is about consolidation loans and debt management will be dealt with in separate posts.
Bear in mind that when you are in debt and you can’t afford to pay back money that you have borrowed or goods you have bought on credit, it is not necessarily the most sensible thing in the world to be thinking about borrowing even more money. If borrowing or spending more than you have is what got you into debt in the first place, it is frankly unlikely that doing more of the same will get you out of it.
There are circumstances in which a debt consolidation loan may improve your situation, but these are far less common than most people suppose. The danger is that people are attracted by the simplicity of a single payment, and the lower monthly payment. It is important to look beyond that to the total amount you will be paying back, compared to your existing debts. The reason the monthly payment is less is usually because the new loan is spread over a much longer period. When you add up how much you are paying back in total over the longer period, you will often find that the consolidation loan is actually costing you far more than your old debts.
The circumstances in which a debt consolidation loan might be a useful thing to do are if your old debts are at a particularly high rate of interest and the interest rates on the new loan will be much lower. If you do take out a new consolidation loan, don’t be tempted to automatically cover all your debts with it. You should list all your debts in order of the rate of interest you are paying on them, and only use the loan to cover the ones that are at a higher rate than you will be paying for the consolidation loan.
Just as there are certain circumstances when a consolidation loan may be useful there are also circumstances when alarm bells should ring and you should avoid them. The times when you should definitely avoid taking out a debt consolidation loan are if you have taken one out previously and it has not solved your problems, or if you plan to use it to pay off credit card debts so that you can carry on using the cards again. In these circumstances the debt consolidation loan is almost certain to simply add to your problems.
The only truly effective way to deal with debt problems is to negotiate with your creditors to agree repayment terms that you can afford. Help and advice with this is available, but not from companies with an interest in selling you a consolidation loan or other commercial debt solution.
Find out about recommended Debt Consolidation companies here.
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