debt consolidation loans

Debt consolidation: Good or Bad?

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Consolidating your loans is often seen as a good way to pay your way out of debt, but is this the best option available?

Debt is part and parcel of everyday life. Most of us have several types of loans such as an overdraft, credit card, bank loan or a store card. Managing all these different payments can be tough, which is why some people often choose debt consolidation loans.

They can make our finances look and feel a lot simpler, but if you’re not careful they can make the problem worse and end up costing more.

When debt consolidation loans can help

If you feel overwhelmed by the number of different payments going out of your bank account, debt consolidation loans can be a good answer. A common approach is to take out a sizeable single loan which can pay off all your other debts. This gives you one single debt and one monthly payment to worry about.

There are many good reasons to do this including:

  • Simplifying your finances: Managing multiple payments can be complicated. With debt consolidation it is much easier.
  • Reducing interest rates: Credit cards are extremely expensive. By paying off these debts with a loan at a lower interest rate you can save money. You might also have taken a loan out with another provider at a high interest rate, but since then have realised you can access capital more cheaply. Debt consolidation loans can offer a way to get a better deal than you have already.
  • Reducing late payment fees: All those loans may well have late payment fees. If you get behind on one,the problem can escalate. Debt consolidation means there is only one payment to worry about.

Debt consolidation can be a great option if you have a good credit rating. The better your credit history the more likely it is that you will be able to secure favourable payment terms with the provider of the debt consolidation loan.

If you plan it well, you could see the overall cost of all your loans fall considerably, but this can be complicated. Loans will vary in their cost and duration. Accurately assessing the total cost of all your loans and comparing that against the debt consolidation loan can be complicated.

It may be a case of deciding between higher payments in the short term at a lower overall cost or smaller payments over a longer period which could leave you paying more. On the plus side, though, it could ease the pressure on your finances on a week to week basis.

The bad side of debt consolidation loans

Debt consolidation is more difficult if you don’t have the best credit history. There are many providers offering debt consolidation loans for bad credit, but these will be more expensive and could increase the overall cost of all your debts.

It also doesn’t solve the problem of the debt. You will still owe the same amount of money, but the way in which you pay will have changed. It can be a long-term process and you may spend several years paying off the debt.

There may also be some hidden costs you might not have taken into account. Existing lenders may charge switching fees if you decide to move the debt to another provider or pay it off early. The debt consolidation loan might also carry fees over and above the interest it already charges.

It is also important to remember that this is not the only option. You might choose debt counselling from a charity or investigate debt settlement plans which could see you paying off a smaller proportion of the debt.

Zero percent balance transfer cards also present a useful option. A card provider may offer an introductory zero percent rate to tempt you in. You can transfer the balance of a credit card and try to pay off as much of it as possible before the introductory rate expires.

Choosing debt consolidation

For all the risks, debt consolidation can be a good option as long as you approach it in the right way. Think of it as part of a debt reduction plan.

Do not look at it as a chance to free up spending money in the short term. If you have paid off credit cards with a debt consolidation loan you may be tempted by all that money on your credit card. This can simply increase your debt and leave you facing the same problem in the future. This time, though, the total debt might be even higher and your options more limited.

Make sure you are comfortable with the repayments and that you will be able to continue paying the loan for its entire duration. Think about what would happen, for example, if you were to lose your job. Would you still be able to pay the loan?

Spend time looking for the best debt consolidation loans. Compare interest rates, payment terms and any fees charged to get a good idea of whether this is the right option for you.

In the end, whether this works for you will depend on how you approach it. If you calculate how much the payments will be and have a clear action plan in place, it can be a good way to move towards a debt-free future. If not, it could create more problems.

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