Debt consolidation: hope for the best, prepare for the worst

29 August 2008

Is now the time to consolidate your debts? At a time like this, does it make sense to bring all your debts together into a single larger loan?

Debt consolidation – pros & cons
Pros: Consolidating your debts can reduce both the interest and the amount you’re paying every month, as well as making your debt much easier to manage.

Cons: It can also mean your debt takes longer to repay and potentially costs you more in the long run.

So, is now a good time to think about a consolidation loan?

Debt consolidation – in uncertain times
On the one hand, no-one’s really sure what lies ahead for the economy as a whole – or for themselves as individuals. In general, the less you know about tomorrow, the more important it is to be prepared. You may be able to afford your debt repayments today, but what if your costs suddenly rise, or your income suddenly shrinks? Consolidating your debts could free up the cash you need to bring your expenditure back in line with your income.

Debt consolidation – in a credit crunch
On the other hand, the issues in today’s credit markets might make debt consolidation loans slightly less attractive than they used to be. After all, lenders are paying more for the money they borrow, and that means they’re often forced to charge more for the loans (including debt consolidation loans) they provide. It also means they’re being more cautious about giving out loans at all, and some people simply can’t get the consolidation loan they need today. (If you’ve been confronted with this problem, see the section called Debt consolidation – the alternatives below.)

Even so, it’s looking like the worst of the credit crunch might be over – for some kinds of secured credit at least. Recently, major mortgage lenders have reduced the rates they’re charging for mortgages. They’re still higher than they were in the days before the credit crunch, but they’re lower than they were in July and there’s no sign they’re about to start rising again. For anyone thinking about consolidating their debts through a remortgage, this is good news.

Debt consolidation – the alternatives
Debt consolidation isn’t the only debt solution available. Depending on your financial situation, you could consider a debt management plan, an IVA (Individual Voluntary Arrangement) or a protected Trust Deed (for residents of Scotland).

None of these debt solutions is ‘better’ than the others. It’s a question of which one is most appropriate for you and your financial situation. Before you make a decision about consolidating your debts – or about any other debt solution – it’s important to talk to a debt adviser who can help you understand your options, along with the pros and cons of each, and help you make the right decision.

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