Expert guide to debt consolidation
16/09/2009
Debt consolidation can help people with multiple debts make their finances easier to manage. By reducing your monthly outgoings and consolidating several debts into one easy-to-manage monthly payment, a debt consolidation loan could make a big difference to your financial situation.
How debt consolidation loans work
A debt consolidation loan is a new loan taken out to pay off multiple existing debts, combining them into just one monthly payment.
If you owe money to several different lenders and are concerned that your debt repayments are taking up too much of your income, a debt consolidation loan can give you a `fresh start` - paying off all your existing lenders, and allowing you to repay the total at a more comfortable pace.
This can be particularly effective if you have unpaid credit cards or overdraft debts - debts which you might not need to pay much towards immediately, but which will probably continue to grow until you do.
Of course, you can also repay things like personal loans - in fact, you can pay off any debt with your debt consolidation loan, as long as the terms of that debt will allow you to pay it off in full.
You can reduce your monthly outgoings with a debt consolidation loan by arranging to repay the debt over a longer period of time than your original debts, and thereby making each repayment smaller. This can free up additional cash to spend on other things and/or keep for emergencies each month - but keep in mind that because you`ll also be paying interest for longer, you may end up paying more over the duration of the loan.
However, you may still be able to save money in the long run if the interest rate on your debt consolidation loan is lower than the interest on your original debts. Over the same time period, a lower interest rate will save you money, but the longer you take to repay the loan, the less chance there is that you`ll save money in the long run.
Is debt consolidation right for me?
In general, a debt consolidation loan may be suitable for people who are able to meet their existing debt repayments, but would like to reduce their outgoings and/or simplify their finances. If that sounds like you, then a debt consolidation loan might help you manage your finances more effectively - but it`s vital to be sure you can afford the repayments.
Debt consolidation loans are unlikely to be suitable for people who are currently struggling to afford their debts, because the reduction in outgoings may not be significant enough to make a real difference. There is also a risk that if they experience a drop in income, they could find themselves back where they started - with a large debt that they are unable to pay off. Anyone in this situation may find a different debt solution could help them `get back on their feet` financially.
Of course, everyone`s situation is different, and you should always speak with a professional debt adviser before deciding on any debt solution.
To find out more about debt consolidation and other debt solutions, click here or call 0800 074 8639 today.
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