Consolidating Debt

Posted by Ben Ryland in Dealing with Debt on 9 January 2017 - Ben is a Senior Credit Analyst at checkmyfile.

Do you have what seems a never-ending mountain of debt and you’re struggling to know what you’re paying and to who? If so, you may be considering debt consolidation, in particular a debt consolidation loan.

A debt consolidation loan is most suitable for those borrowers who have multiple repayments going out each month to different credit providers, normally at different times of the month. Not only does this feel like you are constantly making repayments during the month, but keeping on top of what you’ve paid and when can be a logistical nightmare.

The loan allows the borrower to make one monthly repayment at a fixed rate to clear the debt included in the loan amount, rather than numerous smaller payments over the month.

Although the monthly repayment amount will likely be larger than any of the single monthly repayments you would be making, by having all the debt ‘under one roof’ the consolidated repayment brings everything together and you may be paying less each month for the loan repayment.

A significant advantage of taking the debt consolidation route is that it can take away the hassle and stress of dealing with multiple debts from numerous lenders. Depending on the number of separate repayments being made a month this can fast become an administration nightmare, and if you’re not the most organised person debt consolidation can help to keep the admin side in check – you know what you’re going to be repaying, when and to who.

A single repayment amount a month can also help your household budget effectively, safe in the knowledge you know specifically the consolidation loan repayment amount. As household budgeting is an excellent way of keeping your finances in check and under control, knowing your high number of debts are being paid via this loan method can make sure you have the funds available and if there’s any extra left over.

There is also the likelihood that consolidating your debts to a single repayment may leave you better off if the single repayment amount is cheaper than the individual monthly repayments, as you will not be paying interest on numerous different debts at differing rates.

A debt consolidation loan may not always be the best solution and the downsides to pursuing the debt consolidation route should be considered when making the decision.

By taking out a debt consolidation loan you could well be extending the timeframe to repay your debt and this could mean more interest paid on the debt. It is crucial to check the rates of interest for the consolidation loan compared with what you are repaying on the separate debts. The consolidated amount may not be the lowest interest rate and you could be paying more over the lifetime of the loan. You should also be aware of early repayment penalties when consolidating debt that still has time to run.

When looking at consolidation loans, you may also want to try and avoid the temptation of applying for more than you need. The purpose of this type of loan is to help you become debt free, and by taking more than you need it often defeats the purpose of debt consolidation.

If you are worried about your personal finances and want to talk to someone, there are numerous debt charities which can offer you free impartial advice, such as StepChange and the Debt Advisory Service.

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