Pros and Cons of Debt Consolidation
If you are looking to lower your monthly expenditure and/or simplify your finances
, a debt consolidation loan could be right for you - allowing you to tackle your debts at a rate that you can really afford.
Debt consolidation - what is it and how does it work?
Debt consolidation involves taking out a new loan big enough to repay all your outstanding unsecured debts in one go, leaving you with just one debt.
This basically means that instead of making multiple payments to multiple creditors each month, you would make just one payment to one creditor per month until all your debt (plus any interest it has accumulated) has been repaid.
Some people arrange to slow down the rate at which they are repaying their debt - lowering their monthly payments to a level they know they can comfortably afford.
Before you commit to a debt consolidation loan - or any debt solution for that matter - it is important to understand and consider the good and the bad points of taking this approach. We will now take a look at some of the pros and cons of debt consolidation loans, to help you work out if one could be appropriate for you.
Pros
* If you arrange to spread your repayments out over a longer timeframe, you will pay less each month.
* Debt consolidation could help you protect your credit rating. Making one payment each month should make it easier for you to manage your overall finances and make sure you have enough money set to one side to cover your monthly payment.
* Choosing to consolidate debts with a high APR (Annual Percentage Rate), from credit/store cards for example, could significantly lower the interest you are paying on your debt - which means it won't grow so fast while you're paying it off.
Cons
* Please bear in mind that a debt consolidation loan will not reduce your debts. You will owe the same amount as you did before, although it should be easier to manage.
* If you arrange to make lower monthly payments, your debt will take longer to repay - so you'll be in debt for longer.
* Arranging to spread your repayments out over a longer period of time could lead to you paying more interest than if you had repaid your debt in a shorter timeframe (unless the interest rate on your consolidation loan is significantly lower than the interest rate on your original debts).
Important points to consider
Before you decide if debt consolidation is right for you, it is important to note that it wouldn't be suitable for everyone.
For example:
* someone with erratic earnings (who's not confident they'll be able to service their consolidation loan each month), or
* someone who cannot consolidate all their unsecured debts, or
* someone who doesn't think they'd be able to repay the debt consolidation loan*
*may discover that an alternative debt solution would be more appropriate.
Pros and Cons of Debt Consolidation
By: Fox Thomas
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