Is Debt Consolidation Right For Me?

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A debt consolidation loan could help if you are struggling to repay a number of debts. By reducing your monthly outgoings and/or simplifying your finances, debt consolidation can make a big difference to your financial situation.
However, like any debt solution, a debt consolidation loan is not right for everyone. Here we take a look at the pros and cons of debt consolidation loans, to help you decide whether it’s your best way to get out of debt.
What are the advantages of a debt consolidation loan?
Reduce your outgoings
Most people who take out a debt consolidation loan are looking to reduce their monthly outgoings in order to make their debts more manageable. It’s possible to do this by spreading out your debt consolidation loan repayments over a longer period than your original debts, meaning each monthly payment is smaller.
It may also be possible to reduce your overall outgoings if you are consolidating high-APR debts. So long as the interest rate on your debt consolidation loan is lower than the overall rate on your existing debts, you could save a potentially significant amount of money.
Simplify your finances
A debt consolidation loan can also allow you to ‘put all your eggs in one basket’ – or more specifically, combine all your debts into one.
This means you have only one payment to deal with each month, and you only need to deal with one creditor, meaning your debt is easier to monitor and less hassle to manage.
No impact on your credit rating
In itself, a debt consolidation will not affect your credit rating, like some other debt solutions can. In fact, providing you manage your monthly repayments effectively and on time, it will prove to be a positive entry on your credit history, which should improve your chances of obtaining credit in the future.
However, be aware that if you defaulted on any payments before you took out your debt consolidation loan, these entries will remain on your credit history, even if the loan pays off those particular debts.
What are the disadvantages of debt consolidation?
You could pay more in the long run
Be aware that if you reduce your monthly payments by spreading them out over a longer repayment period, you may also pay interest for longer than if you had chosen a shorter repayment term. This can often mean paying more interest overall.
Your debts could be a burden for longer
Although reduced monthly payments may sound convenient, some people just prefer to get their debts out of the way as quickly as possible.
For example, if you have three years left on your existing debt repayment terms, but spread the balance out over seven years, that means the debt will be a burden on your finances for an extra four years. That said, this can be considered a suitable compromise if you are finding your existing arrangements increasingly difficult to manage.
Consider whether you’ll be able to keep up on your new repayments in the future. If you’re unsure, or your circumstances are likely to change in the future, then another debt solution may be more appropriate.
Doesn’t always address the causes of your debt
A debt consolidation loan may address the symptoms of your debt (i.e. unmanageable repayments), but it cannot address the reasons behind that. For example, if you have been struggling with debt due to an irregular income – you are self-employed, perhaps – then you may also find it difficult to keep up with your debt consolidation loan payments, and there may be other more effective solutions to your problem.
A debt consolidation loan also requires some willpower. It’s easy to fall into the trap of spending the money you have repaid – on a credit card balance, for example – and this can lead to more debt, since you will still have to repay your debt consolidation loan.