What is debt consolidation?

Whether you`re simply looking to reorganise your debts or wondering how you`ll ever pay them off, there may be a debt consolidation solution that could improve your situation.

When people refer to debt consolidation, it can mean one of two (related) things.

• It can refer to a debt consolidation loan - a loan intended to pay off multiple existing debts, leaving you with just one debt to manage.
• It can also refer to any debt solution that enables you to clear multiple debts with just one monthly payment. This does include debt consolidation loans, but not all debt consolidation solutions involve borrowing more money.

In this article, we use the term `debt consolidation` to mean any debt solution that lets borrowers clear their debt by making one payment per month.

What are the advantages of debt consolidation?

There are several advantages of consolidating your debts. These include:

Only one monthly payment to deal with

By consolidating your debts, you are effectively replacing several monthly payments with just one. This can make your debts much easier to manage, as it means you`ll have fewer outgoings to keep track of.

It can reduce your monthly outgoings

Some forms of debt consolidation, such as debt management or an IVA (Individual Voluntary Arrangement), are specifically designed to reduce your monthly outgoings to an affordable level if you can`t make your existing debt repayments.

Even if you`re not struggling but would simply like to free up cash for other purposes, a debt consolidation loan could help. This is a loan intended to pay off multiple existing debts, after which you`ll repay the debt in single monthly instalments to your new lender. You may be able to reduce your monthly payments by repaying the loan over a longer period of time.

What are the disadvantages of consolidating my debts?

Consolidating your debts can have its downsides. These include:

It could affect your credit history

If you are rescheduling your debt repayment arrangements (through a debt management plan or IVA, for example), the fact that you did not keep up with your original agreements will show on your credit report, which could make borrowing money more difficult and/or more expensive for the six years it stays there.

It could cost you more in the long run

If your monthly debt repayments are reduced, it`s likely that you will also be repaying your debt for longer, which means you`ll be paying interest for longer - and therefore you could pay more overall. Note that this wouldn`t be the case with an IVA, which involves actually writing off the portion of the debt you can`t afford to repay.

Should I consolidate my debts?

Whether or not debt consolidation is right for you will depend on your individual circumstances - before you make any decisions, it`s a good idea to speak with a professional debt adviser, who can help you to decide on the best way to tackle your debts.

For more information, click here or call 0800 195 2911 to speak to a debt adviser.

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