The Pros & Cons of Debt Consolidation

For many of us consolidating our debt (combining multiple loans, hire purchases, credit cards into one loan) is a great way to get our finances in order & make managing our money a whole lot easier.

Done right, debt consolidation can help improve a credit rating, cost us less in interest & fees, reduce the stress of managing multiple debts & have better lending terms overall than juggling many debts.

But as with many things there's not a one size fits all approach when it comes to debt consolidation, & there are some potential stumbling blocks that's are important to be aware of.

 

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 Potential cons of debt consolidation

Additional Fees & CostsAlways check out any fees or costs associated with taking out a debt consolidation loan. Things like applications fees, late payment penalties & even early repayment fees maybe included in your contract, potentially costing you more if you're unable to meet your obligations or wish to pay off your loan early.

Damaging Your Credit Score - Should you be unable to meet your repayments at any point & depending on the lenders policy, you may find they report payment defaults quickly or worse send you to debt collection, which will reflect on your credit record.

Of course lenders want to avoid loosing money so often the bigger the loan you have with a lender, the quicker they try to recover the debt.

Pay More in Interest Over Time - When consolidating debt it's important to make sure you're getting better terms overall than prior to consolidation. A common mistake, is to consolidate debt with a focus on reducing repayments, freeing up your budget. However this often means the debt is taken over a longer period of time, & is actually costing you more in interest costs overall, even if the new interest rate is lower.

Accumulating More Debt - By consolidating debt you generally free up credit elsewhere. For example you may use the loan to repay credit card debt but keep the same limit. Or you maybe tempted by interest free deals at your local homeware store. Be careful not to be tempted & start accumulating more debt. Generally if you repay a credit card we strongly  recommend that you close the card or reduce the limit significantly. Also, don't be surprised if your lender actually makes closing or reducing your credit limit a condition of your loan approval.

 

Debt consolidation can certainly be a good solution to help you get out of a vicious debt circle, giving you an opportunity to start afresh.

However, it's important to weigh up the pros & cons  of debt consolidation before signing on the dotted line, & also be mindful of your spending habits & behaviours. Because if your finances aren't managed well, & you continue with old spending behaviours, then you're likely to end up in a worse situation than you started.

If you’d like discuss your debt consolidate options, give us a call we'd be happy to guide you through the process step by step & make sure you're getting an option that is best suited to your situation & spending habits.

 

  • Money Management