Summary: This article looks at the pros and cons of taking out a loan to consolidate existing debt along with some of the considerations necessary before making a decision.
With the soaring cost of living and increasing personal debt, managing multiple loans, credit cards and other debts can become a real headache, especially if an individual is struggling with payments as there could be multiple creditors chasing and pestering for repayment. So it is understandable that some may wish to consolidate all debts into one simple loan with a single monthly repayment. However, there are some important considerations that should first be made.
How much will the consolidation loan cost?
By taking out a larger loan to cover existing loans, it is likely that the loan term will be longer and at a greater monthly expense. How much more will the loan actually cost when compared to budgeting carefully and managing the existing debt as is?
Is the consolidation loans secured or unsecured?
It may seem tempting to take out a secured potato consolidate several unsecured debts such as credit cards, however for homeowners, this could put their property at risk if they fall into arrears and fail to repay the debt.
Is there already difficulty in repaying existing debt?
If an individual is struggling to repay debt, their credit rating may already be poor. This could result in being unable to obtain a consolidation loan, or the terms (such as interest repayments and length of loan) may not be so favourable. This could result in a far higher cost to the debtor, and there is no guarantee it will be any easier to maintain the repayments.
What are the benefits of a consolidation?
The only real advantage of a consolidation loan is to reduce the number of creditors to just one, which will hopefully reduce the phone calls and letters from creditors chasing payment. However, it is possible to achieve this through other means, such as an Individual Voluntary Arrangement (IVA) or Debt Management Plan (DMP). A consolidation loan may also reduce the monthly repayment, but it is likely this will mean the loan will take far longer to repay and ultimately be far more costly to the debtor.
Are there any disadvantages to a consolidation loan?
A mentioned above, it is likely that such a loan will result in the debt taking longer to repay and cost more in interest thus ultimately increasing the amount of debt. Furthermore, if the loan is secured, it could pose a threat to the individuals home if they default on the repayments.
For anyone struggling to repay debt, it is important to seek advice from a licensed money advisor or from one of the free advice services available, such as Step Change, National Debtline or the Citizens Advice Bureau (CAB). As there may be a more suitable option than getting into further debt with a consolidation loan.