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4 pros and 3 cons of debt consolidation

If you’re thinking about tackling your debts, it is important that you look at the advantages and disadvantages before you make your decision. Looking at the pros and cons will help you make a more educated and informed decision about dealing with your debts.

There are a lot of factors to take into account when considering debt consolidation. Your employment status, the types of debt you have, your residential status and your credit history will all affect the solutions available to you.

So, to help you decide whether debt consolidation is right for you, here are the main pros and cons that you should consider.

Some ways that debt consolidation can help you

  1. Lower monthly repayments

    If you have several credit cards, loans or store cards, the total monthly payments to service your debts could be significant. Even if you just make the minimum payment, you could be paying hundreds of pounds every month.

    Consolidating your debts can leave you with one single monthly payment. Often, this will be lower than the various payments you were making before. This leaves you in a healthier financial position on a monthly basis.

  2. Lower interest rate

    You will often find that debt consolidation solutions have lower interest rates than your current debts. This will help you to reduce your interest payments and repay more of the debt with every payment that you make.

  3. It simplifies your finances

    Debt consolidation allows you to replace monthly debt payments with just one single payment. This helps you to manage your outgoings and to budget successfully. In addition, it makes it easier to deal with your creditors as you only have one lender instead of lots of them.

  4. You will know when you will have paid off your debt

    Lots of unsecured debts don’t have an end date. Credit cards, overdrafts and store cards keep charging interest until you pay them off – whenever that may be.

    Debt consolidation generally gives you a specific term for your debt repayment so you know exactly when you will be debt free. This helps give you certainty about your arrangements so you can plan for the future.

Some things to be aware of when considering a debt consolidation loan

  1. You may pay more interest in the long term

    When you consolidate your debts, you will often spread out your debt repayments over a longer period. While your monthly outgoings may reduce and you may pay a lower interest rate, you could end up paying more in total. This is because your repayments may be spread over a longer period of time.

  2. You are fixing your monthly payment

    If you have credit or store cards, you can choose the amount that you want to pay every month. As long as you make the minimum payment, you can pay more off your debts in some months.

    However, debt consolidation normally leads to a fixed monthly cost for the term of the debt repayment. You don’t have the flexibility to pay less some months if you need to.

  3. You may be securing the debt on your home

    Many forms of debt consolidation involve securing a loan on your home. While this can mean you’ll benefit from a low interest rate, it also means that the lender takes a legal charge over your home as security for the loan.

    Should you fail to keep up your repayments on a secured debt consolidation loan, you could lose your home. This is not the case with unsecured loans such as credit cards or personal loans.

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