TV, magazines and the web are flooded with adverts from companies touting debt consolidation loans as the solution to all your financial worries. Is consolidation a worthwhile strategy, or just a way deeper into the mire?

Lower repayments?

The basic idea behind a consolidation loan is that you take out a loan large enough to pay off all your existing debts. The loan will be repaid over a longer term than your current debts, and at a lower interest rate, meaning that your monthly repayments will - in theory - be lower.

Many people do in fact find that their repayments can be dramatically cut, sometimes by 50% or more, and with only one repayment to make every month their financial situation is implified, leading to less stress and worry over meeting payments.

Sounds good, right?

But not everything in the garden is rosey, and there are drawbacks to consolidation that you need to bear in mind when making your decision.

Consolidation drawbacks

Most consolidation loans will be secured on your home. This means that should you get into money trouble again and can’t keep up with your repayments, then you risk losing your home as the lender can apply for a repossession order to clear your debt.

Also, by spreading your debts over a longer repayment term, you’ll probably end up paying more interest in total, despite the lower monthly repayments. The longer the repayments take, the more interest you pay, and the more profit the lender makes, so only take out a loan for the shortest possible time.

Finally, paying off your credit cards and other debts only makes sense if you resist the temptation to start spending again. If you’re not disciplined enough to cancel your cards and resist the temptation to run up new debts, then you could end up in an even worse situation than before.

Decision time…

A consolidation loan can be a useful strategy for dealing with your debt, so long as you bear in mind the drawbacks we’ve listed, and so long as you can get a loan at a low enough rate to make the monthly savings worthwhile. The choice is yours.

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