If you have a number of debts with different creditors, then you may have considered a debt consolidation loan. But what are the pros and cons of a debt consolidation loan? Find out below…
Debt consolidation loans – what are they anyway?
A good question to start with. A debt consolidation loan is a single loan that a person takes out to cover several smaller loans. Why would someone want to do this? Well, it means you are making one payment rather than several, so it is easier to manage, and often, the repayment amount will be less than the combined repayments for the other loans.
Fixing the interest rate
With many debt consolidation loans, the interest rate is fixed for the term of the loan. This means that the amount you will need to pay each month will always be the same. For many people, this makes it a lot easier to budget the loan repayments around their other outgoings and makes planning their finances much easier. There are no surprises, and as long as you don’t borrow any additional money and stick to your budget then you will be able to consistently afford to repay your loan.
Lower interest rates
Chances are, the debt consolidation loan will work out to provide a lower interest rate than your other existing loans – although this may be a bit tricky to figure out, as trying to understand if several different loan amounts at several different interest rates provides a lower overall interest rate than the consolidation loan. There are calculators out there that you can try such as this one from The Guardian.
It may instead be better to look at the overall monthly repayments and tot up the amount you are currently repaying and compare it to the amount you would be repaying with the consolidation loan. If you are in it may be wise to seek financial advice.
If you take out an unsecured consolidation loan then you will not be at risk of losing your home should you fail to meet the repayments. Of course, there would be other negative impacts on your credit, in terms of fines and additional interest charged and potentially legal action – and you should never borrow money if you aren’t certain you will be able to repay the debt – but knowing that your home would never be directly at risk may be extremely reassuring to many.
Providing a path to being debt-free
By consolidating – provided you do not take out any additional credit – you will have a clear end date to becoming debt-free. Many people find that this having a fixed end date is extremely motivating in terms of helping them manage their money better.
It doesn’t necessarily resolve the root cause
Debt consolidation is probably best approached with a view to a wholesale change in your money management attitude. The loan will help solve your short term issues and get you debt-free (as long as you stick to the plan) but if you don’t address the actions and behaviours that got you into debt in the first place then it may just be a sticking plaster for a much bigger problem.
Remember – there are a number of UK charities that can help you with debt advice including stepchange.org, nationaldebtline.org and debtadvicefoundation.org.
It could cost you more
As discussed above – just taking a debt consolidation loan doesn’t in and of itself doesn’t necessarily mean you will pay less overall. Depending on the interest rate and the term it could end up costing you more overall, even if your monthly repayments are lowered. For this reason, you need to carefully assess the options and spend some time working out which option is going to be best for you. As always, if you need help here and aren’t sure which route is going to be your best option, seek help from one of the charities mentioned above.