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Considering Debt Consolidation

There are some advantages to consolidating your debts into one consolidation loan. Having to make just one monthly payment is one of them – rather than having to make multiple payments to a variety of creditors in respect of a number of different accounts. A big advantage is that you have just one creditor to deal with rather than many creditors and so managing your finances is simplified. It is also likely that your credit rating will improve particularly if you include all of your credit card accounts in the consolidation. On top of these advantages, the monthly repayment on the consolidation loan may be lower than the sum of the repayments on the multiple loans.

However this may be due to several factors. One factor is that the term of the consolidation loan may be (much) longer than the terms of the original loans. A second factor is that you may have agreed to allow the consolidation loan to be secured on your property. Lower monthly repayments are usually based on one or both of these factors. While the interest rate on the proposed consolidation loan may be lower that the rate you are paying on (some of) your accounts at present, the total amount you will have to repay could be considerably increased due to the length of the term of the consolidation loan.

So what can go wrong? If you are struggling to make your repayments at present you need to ensure that you can comfortably make the consolidation loan payments in a sustainable way and over the full projected term. You need to stop using the credit lines that you have consolidated. For example, you need to cut up the credit cards you had and stop using any overdraft facilities which contributed to your financial difficulties in the first place. When you have paid off all your accounts and credit cards with the proceeds of the consolidation loan, you will find that your ‘old’ creditors may want to do further business with you and make all kinds of ‘attractive’ credit offers to you. It is best to resist such offers, if you want to avoid struggling again.

Another disadvantage is that you may agree to secure the consolidation loan on your property and that if you are unable to keep up the repayments you may lose your property. While you may achieve a low interest rate by agreeing to secure the loan on your property, the likely long term of the consolidation loan means that you give up some flexibility relating to your mortgage e.g. being mortgage-free when you expected to be or being able to retire (early) when you planned to do so.

So, do think before you plump for debt consolidation. Consider other options which may be more appropriate to your circumstances. For example you may be insolvent and if so you could either enter into an Individual Voluntary Arrangement (IVA) or petition for your own Bankruptcy. These are two personal insolvency processes that protect you from your creditors and that have the full weight of the law behind them. Even if you are not insolvent, you can enter a Debt Management Plan (DMP) with your creditors. You can do this yourself by reaching agreement with each of your creditors as to how you will repay your debts to them. This is sometimes called a self administered DMP. Most DMPs however are administered with the assistance of companies which specialise in setting up DMPs between consumers and their creditors and then administer these plans over a period of years. Whatever you decide, do take advice. Avoid consolidation until you are aware of and have considered all other options.

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If you’d like more information on other sources of free debt help and advice you can visit MoneyHelper – an organisation, backed by government and set up to offer free and impartial advice to those in debt. - Click here to visit MoneyHelper