If you are struggling to pay off debts each month – whether it’s credit cards, store cards or loans that you have taken out from the bank, debt consolidation might be a good idea. That said, there are always pros and cons to every agreement, so make sure you have done your homework and know what you’re getting into. 

What is debt consolidation?

Debt consolidation means taking out a single loan to settle all your other loans in one go. This can mean that you end up paying a lower interest rate, as well as the fact that you will have the convenience of only paying towards one loan each month, rather than having to keep track of many.

A consolidation loan has both advantages and disadvantages, and it’s good to be aware of both before you go any further:

Advantages

• You only have to make one payment at the end of the month.
• Your monthly instalment should normally be less than the total instalments of the consolidated debt put together.
• You can pay off those accounts that might have potentially caused you to get a bad credit score.

Disadvantages

• While you may save in the short-term, consolidated loans stretch over a longer period, so you might end up paying more towards your debts, but in smaller, more manageable amounts.
• If you have trouble with your spending habits, consolidating your debt could lead to more poor spending habits. You may feel more financially-free if you consolidate; however, the credit cards and overdrafts will still be available and may be hard to resist.
• Your debt doesn’t get smaller when you consolidate; you only replace many debts with one larger debt.

What are the alternatives?

While debt consolidation might be a good solution for some people, it might not be the best solution for you. But there are other options to consider as alternatives to this.

• Debt review: The process of debt review takes into account all your debt and establishes an affordable payment structure to help you get out of it, with a manageable amount each month. Your monthly payments may be more affordable if you take this route, and it will protect you against credit providers who could continually harass you to take out credit.
• Debt counselling: You don’t have to feel alone; there are many people who are struggling to pay off debt. If you feel the need to talk to a professional then consider debt counselling. There are experts who are trained to help you find an affordable solution to paying off your debt.

The information contained in this article is for information purposes only and does not constitute professional advice.


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