Debt consolidation advantages & disadvantages

A debt consolidation loan can give people with multiple debts some breathing space. It is essentially a new loan that pays off your existing debts, leaving you with only one monthly payment and only one creditor to deal with.

However, as with any debt solution, there are a number of things you will need to consider before you take out a debt consolidation loan. Here we look at some of the advantages and disadvantages of debt consolidation, to help you decide whether it is the right way for you to tackle your debts.

Debt consolidation: advantages

• Simplify your finances. Your debt consolidation loan replaces your multiple monthly debt repayments with just one, meaning repaying your debt is less hassle and much easier to follow.
• Reduce your monthly outgoings. Most people who take out a debt consolidation loan are looking to reduce their monthly payments and make their debt more affordable. This can be done by spreading your repayments out over a longer period of time, meaning each payment is smaller.

Debt consolidation: disadvantages

• Your debt may be a burden for longer. If you decide to spread out your debt repayments with a debt consolidation loan, it will take longer to repay your debt. This is not a problem providing you can afford the repayments, but it does mean you`ll be in debt for longer - so there is more time in which something unexpected could crop up that could make it difficult to meet your repayments.
• If you can see any reason why your ability to repay your debts may change at any point, then it`s probably worth considering another debt solution. A debt consolidation loan is still a debt, and the consequences of missing payments will be the same as with any other debt.
• You may pay more overall. Repaying your debt over a longer period of time also means paying interest for longer. Since interest is usually calculated based on the balance at a set point each month (or sometimes daily), this means that you are likely to pay more interest overall.

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