Debt consolidation loans are a financial solution that may be suitable to those that have several debts. While on the surface a debt consolidation loan may seem an appealing solution but, as with all loans it is necessary to consider any potential drawbacks that may be associated with it.
What is Debt Consolidation?
Before looking into the pros and cons of debt consolidation, it is necessary to understand what the term debt consolidation means, and the implications for you.
As its name suggests, debt consolidation is the process of consolidating all current outstanding debts into one repayment. A debt consolidation loan may be offered to you so you can pay off your current debts and be left with one single repayment. Some lenders will use your debt consolidation loan to pay off your debts with existing creditors directly, so you don’t have to do it and can simply move onto repaying your new loan.
Being accepted for a debt consolidation loan will be subject to you meeting a lender’s eligibility criteria, passing a credit check and the lenders credit approval process. Therefore, it is recommended that you check your credit report prior to applying, but also that you consider a debt consolidation solution at the earliest opportunity, as any of your debts falling into default could reduce your chances of being accepted.
Debt Consolidation: The Pros
What are the main benefits of debt consolidation loans?
One Single Repayment
Even the most organised individual can find it stressful to deal with numerous payments leaving their bank account throughout the month. By consolidating debts into a single loan, your payments will be reduced into one single repayment, which is usually easier to track and manage. An added benefit is that if you take out a debt consolidation loan with a fixed interest rate you will always know where you are with your money and can plan your finances accordingly.
As well as making your payments easier to manage, you will also have the benefit of not dealing with numerous creditors any more, which can often be a stressful experience.
Lower Interest Rates
People taking out a debt consolidation loan may benefit from a lower interest rate against what they’re currently paying, meaning that over time they can expect to save money.
In many respects this is a double benefit, as people can often find with large credit card debts, for example, that they are making monthly payments that achieve little more than servicing the interest, meaning that in real terms their debt remains the same.
A debt consolidation loan will ensure that, for example, the credit card debt is cleared, and the repayments against the new loan will be reducing the level of debt.
As well as the possibility of lower interest rates, many borrowers that take out a debt consolidation loan may also benefit from a lower regular repayment amount.
Borrowers then have a choice of what they do with their left over money. They may wish to use it as disposable income, although it is recommended that they should look to pay a higher repayment amount if possible in order to clear their debt quicker.
Ask lenders prior to applying for a debt consolidation loan about the ability to make additional payments and any fees that may be payable to do this.
Debt Consolidation: The Cons
In addition to understanding the benefits of debt consolidation loans, it is also important to consider any drawbacks. While debt consolidation loans do present drawbacks, some of these can be avoided if the borrower is smart with their money and views this solution as a path out of debt.
Potentially Accruing More Debt
Without being mindful regarding your finances, it is possible to accrue more debt.
While most loan providers will recommend you don’t apply for further credit while repaying a debt consolidation loan, ultimately this is down to the borrower and their own attitude towards financial management.
You May be in Debt for Longer
Although on the surface the thought of in some cases, a lower regular repayment and lower interest rates might appeal, it is possible that this means you will be in debt for longer.
However, it is important to look at the bigger picture in this regard.
For example, if there are no restrictions around making additional payments, it may be that you’re able to begin paying more towards the debt consolidation loan later in order to reduce the overall interest you’ll pay.
You May Pay More
This is a similar point to the above one, and again something that may be true but that you need to consider in light of your current financial situation.
Again, it is worth working out what you’re currently paying and how long it would take you to become debt free, and comparing this to these two points.
However, it is also worth remembering if you’re someone who is in the cycle of servicing interest on credit cards without actually reducing the debt by very much you may still be saving in the long term, even if initially it looks like you’re paying more than the current debt as it stands.
Making a Decision on Debt Consolidation
If you are currently struggling to deal with numerous payments leaving your account each month and the process of dealing with several creditors, it is easy to see why a debt consolidation loan may be appealing.
You should consider your own circumstances and factor in both the pros and cons of debt consolidation before making a decision as to whether to apply for a debt consolidation loan. Seek independent financial advice if you need to, to ensure you make the best decision based on your own situation.
|Debt Consolidation Pros||Debt Consolidation Cons|
|Move from several repayments to one regular repayment.||Potential for accruing more debt owing due to continued poor financial management.|
|Deal with one creditor instead of several.||Potential to be in debt for longer.|
|You may benefit from lower interest rates.||Potential to pay more in the long term.|
|You may benefit from lower regular repayments.|
Disclaimer: This article contains general comments and recommendations only. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. 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.