Last Updated: Monday 23rd April, 2012
Debt consolidation is a form of debt management when you 'wrap' up all of your existing debts into one package with the aim of making it easier to repay them. So, for example, if you owe money on a couple of credit cards and have an overdraft you may use this route to move all your debts into one package.
Most often this will mean taking out a loan, such as a standard personal loan, a remortgaging/equity loan or a specialist debt consolidation loan. This solution comes with various advantages and disadvantages.
Debt consolidation advantages
- An unsecured debt consolidation loan allows you to move different kinds of debts into one package. So, for example, you could take out a personal loan to repay credit card debts, an overdraft, other loans and so on all at the same time.
- Most of the money that we owe on products such as credit cards will come with high interest rates. Debt consolidation packages will usually have far lower charges. So, you'll have lower repayments to make every month in most cases. You can also minimise your monthly repayments by taking out longer term loans here.
- Your debts won't carry on growing with this kind of loan. Credit cards add interest every month that you do not repay them completely. The right loan, however, will come with fixed interest for the term of the loan.
- You will be able to see an end to your debts. The debt consolidation loan you take out will last for a specific period of time and once this is done you'll have paid everything off. Credit card debts, however, can carry on for years as interest rolls up on your original debts and again on the interest charged on them.
Debt consolidation disadvantages
- Although you may be able to gain lower monthly repayment costs with a debt consolidation package you may well end up paying back more over the term of the loan especially if you opt for a long term deal to keep monthly repayments as low as possible. This route can also take more time to see your debts repaid.
- Many debt consolidation loans will be secured loans - i.e. they will use your home as collateral to back the loan. If you get into further financial difficulties down the line you could well put your home at risk if you do not meet your debt consolidation commitments.
- It can be hard (especially in today's credit crunch) to find really advantageous interest rates. If you are in serious financial trouble, you may not find a loan that you can take out in any case or may not be able to find one with rates low enough to make this a viable solution.
- If you find that you can repay your debt consolidation loan or deal off early you may be charged extra to do so.
- It can be very easy to rack up more debts - this kind of solution can free up your disposable income somewhat and some people find it hard to curb their spending.
In conclusion, whilst debt consolidation can work well for a great many people, it is always recommended to think hard about all of your choices here before you come to a debt management decision that is right for you.
