Debt Consolidation
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Debt consolidation loans can be a lifeline for those who are struggling to pay back multiple debts.  Before you apply for this type of loan, though, you need to understand what debt consolidation is, as well as be familiar with its pros and cons. Knowing this information will help you make an educated decision about whether a debt consolidation loan is the best course of action for you.

What is Debt Consolidation?

Debt consolidation involves combining multiple small debts into a single large debt which usually has more favorable payoff terms. The consolidation process varies a little from person to person, but it can involve the lenders directly paying off your smaller debts or the lenders transferring the loan amount to you so that you can pay off your current debts. In either case, you have the benefit of being able to  repay the debt consolidation loan with single monthly repayments. 

In order to qualify for a debt consolidation loan, you will need to meet our lenders’ eligibility criteria, pass a credit check and be approved by our lenders’ credit approval process. We recommend that you check your credit report before applying for a debt consolidation loan to make sure that you have the qualifications necessary for the loan. We also encourage you to consider a debt consolidation solution before any of your debts default and reduce your chances of being accepted.

The Pros of Debt Consolidation Loans

Debt consolidation loans provide three primary benefits which are as follows:

One Monthly Repayment

Juggling numerous debt repayments every month is stressful and if you fall behind on any of your repayments, you will also have the added headache of creditors calling you.

Consolidating all your debts into a single loan can relieve a significant amount of this stress, because you will have only one repayment to manage every month. Having only one loan and staying current on its repayments will also reduce or even eliminate the risk of creditors calling you.

Lower Interest Rates

Another benefit of debt consolidation loans is that they generally have lower interest rates than other debts. Many people who are heavily in debt pay primarily the interest on their debts as they make their monthly repayments. This means that the principal amount of their debt remains almost the same from month to month.  

A debt consolidation loan with lower interest rates can help these people pay less interest and repay more of their principal debt every month. In the long run, these people will be able to pay off their debt sooner and save on the amount of interest that would have paid otherwise.

Lower Repayments

The third primary benefit that debt consolidation loans provide is lower repayments. In many cases, the monthly repayment amount of a debt consolidation loan is lower than the sum of the original repayments of all the debts that it includes. 

Having only one lower repayment every month is a great help to anyone who is in debt. It makes their debt more manageable and in some cases, allows them to pay a higher repayment amount and repay the debt in a shorter period of time.

Debt consolidation loans can give you single monthly repayments, lower interest rates and lower repayments each month, but they do have a few disadvantages or cons which should not be ignored.

The Cons of Debt Consolidation Loans

Debt consolidation loans have three main disadvantages which we are going to consider below. As we consider these cons, it is important for you to understand that these disadvantages can be avoided if you are smart with your money and view a debt consolidation loan as a means of getting out of debt.

Potential to Accrue Additional Debt

When you take out a debt consolidation loan and see that you only have one monthly repayment, you will probably feel relief and a certain degree of financial freedom. At this point, there is the temptation to take on additional debts. 

We strongly recommend that you abstain from applying for further credit while you repay your debt consolidation loan, but it will be up to you to be smart and not take on new debts.

Repayment of the Debt May Take Longer

In certain cases, debt consolidation loans spread the debt repayment out over a longer period of time, so that the monthly repayment amounts are more affordable. 

At first this might be discouraging to someone who is striving to be debt-free, but keep in mind that the longer repayment period will make the monthly repayments more manageable. These manageable repayments will help reduce the risk of your defaulting on the loan and ultimately help you reach your goal of being debt-free. 

Possibility of You Paying More

As you consider debt consolidation loans, be aware that in some cases a debt consolidation loan will cost you more than your original debts. It is important that you calculate how much more the consolidation loan will cost and weigh that cost against the benefit of having one lower monthly repayment and lower interest rates.

Making a Decision Regarding a Debt Consolidation Loan

If you are currently struggling to deal with numerous debts and creditors, a debt consolidation loan may be able to help you regain control of your finances. 

We encourage you to seriously consider your situation and factor in both the pros and cons of a debt consolidation loan before you decide to apply for one. If you are unsure of what to do, seek independent financial advice to ensure that you make the best decision possible for your situation.

If you decide to apply for a debt consolidation loan with National Loans, you can contact us to speak with a personal loan specialist or fill out and submit your application.

Debt Consolidation Pros

  • Combine several repayments into one monthly repayment.
  • Deal with one creditor instead of several.
  • Possibility of lower interest rates.
  • Possibility of lower monthly repayments.

Debt Consolidation Cons

  • Potential for accruing more debt if you aren’t smart with your finances
  • Repayment may take longer.
  • Potential to pay more in the long term.

 

Disclaimer: This article only contains general comments and recommendations. This article has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the comments made in this article with regard to your objectives, financial situation and needs before taking any action. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.