Reasons to consolidate debt
There are quite a few reasons to consolidate debt. It varies from person to person, but the main reasons people take out debt consolidation loans are:
1) To simplify their finances & protect their credit rating
Keeping track of multiple debts can be difficult as well as time-consuming. If someone`s paying money towards five unsecured debts every month (for example: two credit cards, a store card, a personal loan and an overdraft), it`s easy to miss a payment, or forget to make it on time. Lenders will often impose a charge for this, and `negative entries` on an individual`s credit rating can make credit both harder to obtain and more expensive in the future.
2) To reduce their monthly debt payments
If someone has had problems keeping up with payments to their unsecured debts, debt consolidation can be an opportunity to take a good look at their finances and figure out how much they can afford to pay towards their debt every month, without taking up every penny of their disposable income.
Of course, although arranging to repay a debt more slowly can reduce the size of their monthly payments, it will also delay the day they`re debt-free, and can end up costing more, as the debt will be accruing interest for longer.
3) To reduce the interest they`re paying
Some kinds of credit (such as credit cards and store cards) tend to charge particularly high interest rates. Many debt consolidation loans can charge much lower interest rates, especially if they`re secured against property.
Having said that, tenants can`t take out secured debt consolidation loans as they don`t own property - and homeowners should think very carefully before they secure any debt against it, as their home could be at risk if they don`t keep up with repayments.
4) To give themselves a date when they know they`ll be debt-free
When someone replaces multiple debts with a single debt consolidation loan, it`s easy for them to see when they`ll be debt-free. This makes it much easier to plan ahead.
Note: Consolidating your debts might not be a good idea if you`re not sure you can keep up with the repayments - if your income isn`t reliable, for example, or you think your financial circumstances might change.