Debt Consolidation

Debt consolidation loans can be an effective way for some consumers when paying off their debts; however such loans must be scrutinised carefully. As with all financial instruments, debt consolidation loans have both advantages and disadvantages.

A debt consolidation loan substitutes multiple smaller debts with one single loan. The main benefit of the consolidation loan is that the monthly payment may be lower than the combined monthly payments of the smaller debts, although repayment may take a lot longer.

As an example, assume that you hold three loans. The monthly payments for loan 1 are £75, loan 2 £100, loan 3 £125. Each month, your repayments are £300.

With a consolidation loan, your new lender may be in a position to provide a reduction in repayments to around £200 per month, freeing up £100. Almost invariably it will take longer to repay a consolidation loan than the separate debts, and this longer period may ultimately cost more in interest.

When using a consolidation loan to pay off existing credit lines, it is important that the existing credit lines are terminated in order to remove the temptation to re-spend the money paid off by the consolidation loan.

Before taking a consolidation loan, you should take a very careful look at your finances. If your consolidation loan is secured on your property, you will be at risk of repossession should you default on the loan; if the loan is unsecured, you would have a single majority creditor that could make life difficult should you need to miss payments or take out a debt management plan or IVA (Individual Voluntary Arrangement).