Debt consolidation: a proven debt solution?

23 July 2009

Debt consolidation is an ideal debt solution for many people. But how does it work, and is it always effective?

As with any debt solution, you should be sure that debt consolidation is right for your circumstances before you go ahead - so here are a few points you may want to consider.

Debt consolidation loan

A debt consolidation loan involves borrowing enough to pay off your existing debts, effectively combining several debts into one. You will then make just one monthly repayment to your new lender, instead of having to deal with a number of repayments each month. When you do this, it`s vital you arrange a realistic repayment period, with monthly payments you can afford.

Many people who take out a debt consolidation loan will reduce their monthly payments by repaying the debt over a longer period of time. This can be very useful for freeing up additional cash, but remember that you will also be paying interest for longer - and so you may end up paying more overall.

However, it may still be possible to save money overall if your debt consolidation loan`s interest rate is lower than the interest rates on the debts you are consolidating. However, the longer the repayment period, the less likely it is that you`ll save money in the long run.

That said, the overall cost may not be the most important thing - for a lot of people, the main thing is that the month-to-month cost is lower, which makes the debt more affordable in relation to their monthly income and outgoings.

Does debt consolidation always work?

This will depend largely on how well you are currently able to manage your debts.

Debt consolidation is usually most effective for already manageable debts. It enables the borrower to improve their financial situation by reducing their monthly outgoings and simplifying their finances in the process.

However, it is not suitable for people who are really struggling to repay debt, as the savings that can be made on a monthly basis are unlikely to be big enough to make a significant difference in this situation.

If you are having trouble repaying your debts, you may want to consider another debt solution, such as a debt management plan or an IVA (Individual Voluntary Arrangement).

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