Debt Consolidation Loan: Pros and Cons

Debt consolidation is big business. As personal debt in this country climbs to an all-time high, companies offering debt consolidation loans are flourishing. If YOU are considering this option, be very careful. The first and foremost thing you have to remember is that these companies are in business to make money, not to help you. So however seductive and sympathetic their ads may be, you always need to be on your guard.

So could a debt consolidation loan help you? Yes, in many ways it could.

• You can use it to pay off your high-interest commitments such as credit-card and store-card debts. The debt consolidation loan will total all these together and you should end up with a lower monthly outgoing overall.
• A debt consolidation loan is much more convenient than having lots of different payments going out on different dates of the months. Having just a single payment, and knowing what date it goes out, enables you to budget your income much more easily, and gives you a feeling of being more in control.
• A debt consolidation loan can help you improve your credit rating. As far as your previous creditors are concerned, your balance is paid off. As long as you make regular payments and don’t get into further debt, your credit rating can only improve.

But before you jump in with both feet, there are many things you need to be aware of.

• The repayment terms of a debt consolidation loan will probably be for a longer time period. This means that although your interest percentage rates may be lower, and so your monthly repayments may be more affordable, the total amount of interest you will pay over the term of the loan will actually be greater.
• A debt consolidation loan can give you a false sense of security. This is actually one of the biggest pitfalls. It is all too easy, when you have just the one affordable monthly payment, to feel your problem is “solved”, and you can start spending money again. It’s especially tempting if your credit card balances have been included in the debt consolidation loan and so your cards are suddenly “clear”! You start thinking of all the things you can buy with your cards! In fact, research shows that the majority of people who take out debt consolidation loans end up with more debt than they had before.
• Don’t risk losing your home! If your debt consolidation loan is a “secured” loan, it will probably be in addition to your mortgage, which will mean another charge on your home. Just one missed payment will be very hard to make up and could lead to a slide into arrears. This could put your home at very serious risk.

The important thing is not to snatch at what seems a quick solution to your problems without thinking it through. Take advice from a debt counselling service, a financial adviser or an independent broker and make sure that the solution you choose puts you in a better not a worse situation.

Sean Horton is a Director of Loans Connection who offer debt consolidation loans