To debt consolidate or not to debt consolidate?

Do these sound familiar?

‘Clear all your debts today with one easy monthly payment’
‘Fast pay out, whatever your credit history’
‘We like to say yes’
‘Apply online now for a quick decision’

These are just some of the tempting offers that we see daily, inviting us to look at consolidating all our debts into one easy payment. But should you consolidate your debts? What are the pros and the cons?

We often get questions about what is the best way to consolidate debts or how to go about it. We don’t tend to recommend it as we think that consolidation is rarely the best option.

Why is it unlikely to be the best solution available?

  1. Lenders often offer a consolidation loan on the proviso that it is secured against a property. This increases the chance that they will lend to you as it limits their risk. However, this would mean that your house is at risk if you are unable to maintain the payments on the loan.
  2. Often people that are looking for consolidation loans have already maxed out their current borrowing facilities. This can mean that access to further credit is limited. This article gives more information on how a credit file works and how to improve it.
  3. When consolidating debts, although the monthly repayments can be more manageable, you’re actually repaying more in total through interest payments.
  4. Consolidation loans can be seen as a debt ‘solution’. Although as it means taking out more credit, this doesn’t make sense!
  5. The temptation is there to use old credit cards that have been included in the consolidation loan. This can escalate the problem very quickly.

In some instances, a consolidation loan can be a viable option. If you are thinking about taking one out, you should consider your situation first.

  1. Put together an effective and realistic budget. Don’t forget to put aside for costs that aren’t monthly, such as your car MOT or visits to the dentist. Use an online budget planner to help you.
  2. Don’t over-commit and borrow more than you can afford. Use your budget to help you work out how much surplus money you have.
  3. Is there an option of a 0% balance transfer instead? If it’s the interest that’s unmanageable, switching to a credit card with no interest could be a better option (but remember to cut up and close the account on the old card).
  4. Ensure that you’re applying for a consolidation loan and not a fee-charging debt management plan. These are two very different things, and a DMP could mean defaults, CCJs and further interest and charges whereas keeping up to date with a consolidation loan won’t.
  5. Consider your options with your local Credit Union. They aren’t just for savings; they can sometimes provide low interest rates on loans too.

We recently produced a guide to debt consolidation – access it on the StepChange website.

If you’re considering debt consolidation as an option try our online debt advice tool or contact us first, as there may be more appropriate solutions that you may not have thought about.

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