Is debt consolidation the best solution for smaller debts?

If you would like to reduce your monthly outgoings and simplify your finances, a debt consolidation loan could help you to do just that.

However, debt consolidation loans are not suitable for everyone`s situation, so you should be sure that it`s right for you before you go ahead.

How debt consolidation works

A debt consolidation loan enables you to `group` several debts together by paying off your existing debts with your new loan, effectively leaving you with just one debt and one monthly payment to deal with. This can make managing your finances much simpler.

You may decide to repay your debt consolidation loan over a longer period of time than your original debts, making each payment smaller, and freeing up additional cash each month.

Repaying your loan over a longer period of time than the original debts may, however, mean you end up paying more in the long run, as you`ll also be paying interest for longer.

That said, you could still save money in the long run (as well as every month) if the interest rate on your debt consolidation loan is lower than the rates on your original debts.

Does debt consolidation work well with smaller debts?

It`s not really a case of how big or small your debts are - it`s more about your ability to repay them at a comfortable rate. In general, a debt consolidation loan is only suitable for debts that you are actually able to manage, but would prefer to repay in smaller amounts over a longer period of time.

After all, just because you can afford your current payments, this doesn`t mean it`s easy to do so - you may be worried that your payments are taking up most of your disposable income, leaving you with very little for unexpected costs and other emergencies. By reducing the size of your payments, a debt consolidation loan could help you repay the money you owe at a realistic rate, reducing the risk of missing payments.

If you do take out a debt consolidation loan, the actual amount you`re able to borrow may vary from lender to lender, and will depend to an extent on your credit rating and financial situation. Remember that lenders may be prepared to lend you more if you can secure the loan against your home - although this can put your home at risk if you fall behind on your repayments.

If your debts are unmanageable - if you can`t keep up with the payments - you should consider an alternative debt solution, such as a debt management plan or an IVA (Individual Voluntary Arrangement).

For more information on ways to tackle your debts, click here or call 0800 195 2911.

Tags: debt, debt consolidation, consolidation, loans

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