It is fair to say that for many people, the automatic reaction to getting into debt is to want to borrow more money to pay if off. This is perfectly logical in many ways - because your problems are to do with having no money, you look at how you can get some more. Unfortunately, this can often lead to a temporary feeling of relief, followed by the gradual realisation that the situation has actually just been made worse.
The reason the long term situation becomes worse is that debt problems are caused by not having enough money to pay back money you have borrowed or goods you have taken on credit, and borrowing more money simply increases your burden of debt. While you may get a temporary injection of cash, you have no less to pay back than you did before (probably more), and your real income is no greater.
Debt consolidation loans are the commercial lenders answer to the widespread desire to borrow money to pay off debt. The principle behind debt consolidation is that you take out one big loan, pay off all your other debts, leaving you with only one monthly repayment to worry about. One of the main selling points of such loans is that your new monthly repayment will be lower than the cost of all your combined debts.
It is important to understand that there is nothing magical happening here - your debts do not diminish or go away. The reason your new payments are less is that they are spread over a much longer period than your other debts. The fact that you are still making payments long after your original debts would have been paid off means that you end up paying back a total amount that is often much more than you would have paid without the loan.
I don't want to say that consolidation loans are always a bad thing, but it is useful to know that in the majority of cases the borrower ends up paying out more money than if they had not taken out the loan. The main time when a debt consolidation loan may actually benefit you is if you already have debts which are at a very high rate of interest. If interest rates have dropped since you acquired your original debts it is possible that taking out a loan at a lower rate of interest could save you money. In order to check whether this is the case, you will need to know the interest rate you are paying on each existing debt, as well as that of the new consolidation loan.
A lender offering you a debt consolidation loan will be keen for you to take out a loan that is large enough to repay all of your outstanding debts. Given what I have said about interest rates, it is important that you only take a loan out for enough to cover the debts that are at a higher rate of interest. An easy way to work this out is to make a list of all your debts and put them in order of their interest rates, with the highest at the top. Draw a line through your list at the interest rate of your consolidation loan, and only borrow enough to pay off the debts that are above that line.
Get advice on different ways to borrow money.
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