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Advantages and Disadvantages of Debt Consolidation a summary

Advantages and Disadvantages of Debt Consolidation a summary

by admin on 18 September 2007

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Debt Consolidation is a solution for someone who has plenty of disposable income. Many people with credit and store card debt pay exorbitant interest rates, in some cases as high as 25%. It doesn’t take a genius to understand that if you were to pay a lower interest rate for such loans you can save quite a bundle of money! This is achieved by combining all the high interest debts into one low interest loan. Debt consolidation, therefore, amounts to restructuring your old debt. You take out a new loan so that the payments you make are less each month. Some people take out debt consolidation loans that have similar interest rates to existing debts but are paid over a much longer term. Because the loan is over a longer period the monthly payments are therefore less. This approach to debt consolidation is not the most optimal as it results in saddling yourself with more debt for a longer period.

The consolidation solution works, however, if you can get a loan with a low interest rate and you are disciplined enough not to take on any new debt. Refuse any tempting offers to take another £1,000 to fritter away on a holiday. If you do get a debt consolidation loan make sure you pay off all your other debts with the money and pay your credit card debt on time from thence forward.

The debt consolidation industry is a huge industry in the UK. Of the loans that are sold many are secured against a property. The interest rates tend to be higher than the high street banks so it’s preferable to try to obtain a loan with the high street banks or credit unions first. Don’t take out a consolidation loan if the interest rate is higher or similar to your existing rates.

Even if you have successfully obtained a consolidation loan for the full amount that you owe on your unsecured loans and credit card debts, it is worth your while making a reduced (say 70% or 80%) settlement offer.

The disadvantages of Debt Consolidation are:

  • You won’t reduce your debt just the payments to service it.
  • Can increase the time it takes to pay off your debts.
  • It can be difficult to get a suitable loan.
  • Some consolidation loans have inflexible terms punishing you when you pay it off too early or not allowing you to overpay.
  • Companies will attempt to push other products with the loan (insurance cover etc.)
  • The loan you use to consolidate is often secured against your house making it at risk if you do not keep up the payments.
  • Some people foolishly “consolidate” at a higher interest rate and borrow extra money. Do not do this.
  • The debt consolidation loan itself may be very difficult to pay off considering your circumstances.
    As such it is usually not a good solution for people in a serious debt crisis.

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The advantages of a Debt Consolidation are:

  • A consolidation loan at a lower interest rate can potentially save you a lot of money.
  • It is convenient to combine your debts into one loan as you only have to make one single payment.
  • You stop getting caught for late payment charges.
  • It can be a good solution for someone who has badly structured debt and has sufficient excess income to pay the debt consolidation loan.
  • Maintains your credit rating.

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