Debt consolidation is a very widely known idea and is therefore one of the first things that come to mind when people experience problems with personal debt. It is so widespread compared to other ways of tackling debt that it is often the only solution that people are even aware of. Anyone searching on the internet will find no shortage of ideas for dealing with debt, the vast majority of them designed to make money for someone else.Borrowing more money is almost never the way to solve a debt problem. It is borrowing money that gets people into this position in the first place, so borrowing even more is usually the last thing they need. As well as understanding something about what is required to really solve personal debt problems long term, this article is designed to highlight some of the consequences of this type of loan.What Are The Attractions of Paying Off Debts With A Loan?I realise that one of the attractions to people of paying debts off with a new loan is just the sheer practicality of having only one main payment to think about instead of lots of smaller ones. This is clearly a benefit if you struggle to keep a track of all your debts and creditors. However, compared to whether the loan will actually solve your debt problem or not, this is a very minor consideration. It is surely better to find a few practical systems for getting yourself more organised than to take on a loan that will make your whole situation worse.The other main attraction with debt consolidation loans is of course the promise of lower monthly payments. It may seem a bit obvious, but the length of time your repayments last is just as important as how much you pay each month. Reducing your debt repayments from £300 per month to £150 certainly looks attractive, but not if you are going to be making the payments for five years when your previous repayments would end after two years. This move would reduce your monthly repayments, but mean you spend £1,800 more to clear your debts.I do not want to say that debt consolidation is never a good option, but it is the best option an awful lot less frequently than people think. For this reason, it is something that requires some understanding above and beyond the positive spin of the loan companies before going down that route.When Debt Consolidation May Be A Good Option
When you have debts that are at particularly high rates of interest.
When the interest rates have dropped considerably in the period since you took on the debts.
When you have properly considered your financial position and know for sure that you can manage to keep up the repayments.To properly understand what you can and cannot afford in terms of repayments, you should prepare a Personal Financial Statement. Help and templates are available online to assist you in this process. When Consolidation Is Best Avoided:
When you have tried debt consolidation loans before and you have not managed to keep up the repayments.
When you need a loan to pay off a previous debt consolidation loan.
When you want to pay off credit cards in order to carry on using them.
When you have not worked out your exact financial position and what you can afford to pay each month.
When you have not worked out the total cost of paying back your existing debts and compared this to the total cost of paying off the debt consolidation loan.
When the loan is to be secured against your home.Beware of Secured LoansMany offers of debt consolidation loans are only available to homeowners and may also be advertised as suitable for people with poor credit ratings. This is because the loan will be secured against your home, so they do not have to be so picky about your credit rating as they will simply sell your home to get their money if you default.Possible Debt Consolidation Loan Consequences:
Your overall debt will probably be increased, meaning you are in debt for much longer and have to pay back much more than you otherwise would have.
You do not tackle the root causes of your debt or learn how to deal with it long term.
If you do not keep up repayments on the new loan your situation could become even worse than before.
If you take out a loan that is secured against your home, you could lose your home if you do not keep up repayments.Debt Consolidation Loan Consequences: ConclusionsWhile the right debt consolidation loan at the right time could be the answer, it is far more likely that they will make things worse, and the possible consequences can be quite serious. If you do wish to go for debt consolidation, always shop around and compare rates, and always compare how much you will pay back under the loan with what you will pay in your current situation.There is only one real way to tackle your debt problems long term, and that is to understand exactly what your financial situation is and negotiate with your creditors to repay your debts on the basis of what you can actually afford. This must be coupled with tackling any issues around irresponsible spending or borrowing.
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