The pros and cons of debt consolidation

Does it benefit you to combine your debts?

If you have more than one type of debt then you might have considered the option of debt consolidation. This is essentially a new debt within which you combine all those loans and credit card amounts you already have. It has both benefits and disadvantages – sometimes it can be a real lifesaver but, in some situations, it’s not always the best deal.

The pros of debt consolidation

  1. Getting control of your finances back

If you feel very overwhelmed by your debts, you’re missing payments because you can’t keep track or your finances feel out of control, debt consolidation can help. Instead of multiple payments you’ll just have one, which can be a huge relief if you’re wasting a lot of time each month trying to work out which creditor to pay first.

  1. Lower interest rates

If you can find the right debt consolidation loan then you can lower the overall amount of interest you’re paying on the debt you have. This works particularly well if you have a lot of existing credit card debt – with very high interest payments. Switching that to a personal loan via debt consolidation can reduce your overall interest.

  1. Reducing what you have to pay each month

If you’re finding it hard to manage your finances as they are, debt consolidation offers the opportunity for a new arrangement. It could be a longer-term loan, which allows you to make smaller repayments each month, for example. The longer the term of the loan, the more interest you pay – but if it means that you take the pressure of your finances on a daily basis this may be a small price to pay.

The cons of debt consolidation

  1. It’s very easy to get into yet more debt

If you’ve paid off your credit cards with a debt consolidation loan it can be very tempting to then keep them with a zero balance, but not close them down altogether. And then a couple of months later you need something so you start using the cards again. A year down the line you’ve got the debt consolidation loan, plus the new credit card debt and you owe even more.

  1. It could cost you more eventually

Banks don’t lend because they like you, they do it to make money. Even debt consolidation loans with great interest rates can be costly if they’re borrowed over a very long period of time. Some banks will front load their interest so, even if you pay off the loan early, you still have to pay some – or all – of the interest for the term you originally signed up for.

If you’re thinking about debt consolidation then there are some key questions to ask yourself:

  • Will I close the accounts of the debts I pay off?
  • Is there another way to clear my debts sooner?
  • How much do I still have to pay if I repay this loan early?
  • Will debt consolidation help me to get my finances back on track?
  • Will I pay less interest if I consolidate my debts?


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