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When is debt consolidation a good idea to eliminate your debts?

Debt consolidation is one of the most popular ways to help you to become debt free. It can help you to reduce your monthly repayments, simplify your finances and take control of your debts. By consolidating various loans into one single, affordable monthly repayment you can potentially cut your interest costs and save money.

However, debt consolidation isn’t always the right solution. So, our guide looks at four situations when debt consolidation may be a good idea, and also looks at when alternative options may be more suitable.

When debt consolidation is a good idea

A debt consolidation loan can help you to simplify your finances and to cut the monthly cost of repaying the money that you owe, but it is not always a good idea.

Debt consolidation is only an option if you are basically in control of their debts and your income and expenditure. If you are struggling to manage your finances and your debts then it may not be the best solution.

Most debt consolidation solutions involve taking out a debt consolidation loan. This means that you should only take a loan out if you are confident that you will be able to maintain your payments and make sure the loan is paid off in full.

There are four main situations when debt consolidation can be a good idea. These are:

  1. When you want to reduce your monthly repayments

    If you have various debts then you may be making several payments every month. Even if you are only making minimum payments to credit cards, store cards or loans, your total outgoings every month could be significant.

    A debt consolidation loan can help you to reduce your monthly outgoings. Often, you can take the loan out over a longer period, making the monthly payment more affordable to you. This can help you to reduce your outgoings but you should be aware that you may pay more interest in total as the debt is being taken out over a longer period.

  2. When you want to pay less interest

    Interest rates on unsecured debts can be high. In March 2012, the Daily Telegraph reported that the average lending rate on overdrafts was 19.5 per cent: the highest since comparable records started. In addition, the newspaper reported that the average interest rate being charged on credit cards was 17.3 per cent, the highest for 11 years.

    Many debt consolidation loans are secured on your home. As a lender will take a legal ‘charge’ over your home as security, they can often offer competitive interest rates for the borrowing. This means that you will often pay a lower interest rate on a debt consolidation loan than you would on unsecured borrowing such as credit cards. A debt consolidation loan can therefore reduce the interest rate that you pay.

  3. When you want to simplify your finances

    Making lots of payments to a range of credit cards, store cards and loans every month can be time consuming and stressful. You have to make sure that you make all your payments on time to a range of different creditors.

    When you consolidate your debts you are left with one payment, one creditor and one direct debit. It can make your finances much more straightforward and put you back in control of your debt.

    Taking out a debt consolidation loan also gives you the chance to think about how you are handling their debts and it is a good opportunity to arrange a fixed repayment schedule.

  4. When you want to achieve a better result with your creditors

    Debt consolidation companies can often achieve a better result with your creditors. This is because they are specialised in this area and negotiate with creditors for a living. However, bear in mind that you may pay a company fees for their services.

When debt consolidation may not be a good idea

While debt consolidation offers a number of benefits, there are several reasons why it may not be the right solution for you.

For example, when you take out a secured debt consolidation loan you are effectively securing previously unsecured debt. This means that if you don’t pay your debts, the lender can potentially take possession of your home. If you hadn’t consolidated your unsecured debts, your home would not be at risk.

In addition, debt consolidation may not be a good idea if you are not in control of your finances. Unless you take steps to keep your outgoings under control, you could find yourself back in debt in the future. Consolidating your debts and then continuing to use credit cards is likely to see you back in debt problems. So, unless your debt consolidation is paired with a change in the way that you manage your finances, it is unlikely to work.

Finally, debt consolidation solutions will generally see your debt repaid over a long period of time. This could actually mean that it takes you longer to become debt free and you could end up paying more interest in total.

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