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Debt consolidation: how much can I reduce my payments by?

26 August2009

For people in debt who want to ease the pressure on their finances, a debt consolidation loan can be a good way to reduce their monthly payments.

How debt consolidation can help

A debt consolidation loan is a new loan big enough to cover multiple existing debts. It essentially `combines` several debts into one, making your debt easier to manage.

Debt consolidation also gives you the opportunity to reduce your monthly payments by arranging to repay the debt over a longer period of time (and therefore in smaller amounts). This can reduce the pressure on your finances, and can free up cash for other purposes.

How much can I save?

This amount by which you can reduce your payments will obviously vary depending on factors such as the size of your debt, how quickly you`re repaying it, the interest rates involved, and how long you would take to repay your debt consolidation loan. Here`s a simplified example, involving a debt consolidation loan that`s used to pay off multiple debts:

Debt (total) - £8,000

Current repayment period - 5 years
Current interest rates (average) - 12%
Current monthly payments (total) - £177.96
Total amount to be paid - £10,677.33

New repayment period - 7 years
New interest rate - 8%
New monthly payment - £124.69
Total amount to be paid - £10,473.94

As you can see, by extending your repayment period and paying a lower interest rate, you can significantly reduce the amount you pay each month.

You`ll also notice that the total amount repaid is lower, due to the difference in the interest rate.

You could, of course, arrange to repay the debt more slowly than this. This would reduce the monthly payments further, but would increase the overall cost, as your debt would be accruing interest for longer.

Even then, many people will accept paying more overall if it means they can reduce their monthly outgoings.

Is debt consolidation right for me?

Debt consolidation can be suitable for people who are able to meet their existing debt repayments, but would feel more comfortable repaying those debts in smaller instalments.

If you`re already really struggling with your debts, however, debt consolidation is unlikely to be right for you. The reduction in your monthly outgoings may well not be significant enough to make a real difference, and there`s a risk that if your circumstances change you could find yourself in trouble with debt all over again.

Whatever your situation, remember that a debt consolidation loan is still a debt. You must be sure that you can commit to regular monthly payments before you go ahead. If you can`t, you may want to consider a different debt solution.

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