Debt Consolidation: The Pros And Cons

Lots of people these days find themselves mired in debt and finding it really difficult to meet the necessary regular payments due on credit cards, overdrafts or other forms of borrowing, such as loans from payday lenders. If you find yourself in that position then the prospect of freeing yourself from having to pay several different standing orders or direct debits every month in place of one payment on a debt consolidation loan can seem an attractive prospect. But is this the right course of action?

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The rationale behind the idea of a debt consolidation loan makes good sense – you take out a new loan from a single lender and use those funds to pay off the debts you have from a number of disparate creditors. The main idea is that you end up paying out less each month under your debt consolidation loan than you did with the previous debts you were trying hard to service each month. The downside is that your new loan will probably be taken out over a longer period of time, so as to make the monthly payments more affordable, which in turn means you will eventually end up paying more interest over the term of the loan than you would if you had perservered with your existing arrangements. You may also have to settle an early redemption fee or fees to your existing creditors for paying your accounts off early. Notwithstanding this, many people are happy with this trade-off because it makes life more manageable.

There is one thing you also need to be wary of if you do decide to go for a debt consolidation loan. Try not to let your new arrangements lull you into a false sense of security. You still owe the same amount – or maybe even a little more – than you did at the start of the process,. If you have managed to reduce your monthly payments you may be tempted to be a little more relaxed in your attitude to your outstanding debt. Try not to let this happen. If you have to consolidate your consolidation loan, then you will find yourself in an extremely difficult situation, trapped in a spiral of  debt.

Posted in Personal Finance

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