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People in debt may be able to simplify their finances, reduce their monthly outgoings and reduce the interest rate they're paying on their debt with a debt consolidation loan. It's a simple idea: a new loan large enough to pay off the borrower's other debts in one go. This makes the monthly repayments much simpler and less stressful, but that's by no means the only advantage of debt consolidation. First of all, simpler budgeting isn't just about making life easier. It can also help the borrower avoid making payments late - or forgetting to make them at all. In other words, it can help protect them against late- / non-payment charges and damage to their credit rating. In the long run, this can prove to be a real benefit, as a healthier credit rating is likely to reduce the cost and complexity of accessing credit in the future. Second, debt consolidation loans can come with much lower interest rates than other forms of credit, especially credit cards and store cards. That means the debt will grow at a slower rate. Third, consolidating debts gives the borrower a chance to take a really good look at their finances and figure out how much they can realistically afford to repay every month. After all, many people suddenly realise that they're facing substantial debt that they'd barely noticed they were acquiring. They've borrowed a bit here and a bit there, until they realise their debts are much bigger than they expected - and so are their monthly repayments. If they take out a debt consolidation loan, they can think carefully about how quickly they can afford to pay it off. Repaying a loan slowly will mean lower monthly payments but a higher total cost (as it'll be accruing interest for longer); repaying a loan quickly will mean higher monthly payments but a lower total cost (as it won't be accruing interest for as long). Debt consolidation - the disadvantages Debt consolidation isn't always the best way forward. It may not even be an option for some people - if they can't find a loan, for example, or if they aren't sure they'll be able to keep up with the monthly repayments. Anyone in that situation should talk to a debt adviser about different ways of dealing with their debts. Plus, there's a certain psychological risk associated with debt consolidation. If someone replaces five GBP1,000 debts with one GBP5,000 debt, it's tempting to think they've reduced their debt - but it's also misleading! They may have fewer debts, but they'll have just as much debt in total! What's more, consolidating debts can 'free up' lines of credit such as credit cards. Someone who was at or near their credit card limits could consolidate their debts - and suddenly be able to borrow thousands more on their cards! Clearly, this is dangerous, unless they cut up those cards as soon as they pay off their credit card debt, or unless they know they'll be able to resist the temptation to use that credit.
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For more information on debt consolidation, debt management and other debt related issues, visit www.thinkmoney.com/
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