What is debt consolidation?

27 December 2016

Debt consolidation is a loan that you would take out to consolidate several smaller loans into one loan. Basically, paying off the balances of all the other loans. The goal of a consolidation loan is to reduce monthly instalments usually by means of lower interest rates and extended payment terms. If this sounds like a solution that could work for you, it is worth your while to look a little deeper into the advantages and disadvantages of a consolidation loan. So let’s have a look at some of them.

Advantages

  • You only have one payment at the end of the month.
  • Your monthly instalment should normally be less than the total instalments of the consolidated debt put together.
  • You can pay off those accounts which might have potentially caused you to tarnish your credit score.

Disadvantages

  • Although you might save in the short term because of reduced interest rates, consolidation loans normally stretch over longer periods of time so you might end up paying more towards your debt in the long term.
  • Consolidating your debt can potentially open doors for more poor spending habits. Paying off your debt can give you a false sense of financial freedom, but those credit cards or over drafts will still be available to use and this might cause you to fall into a worse debt situation.
  • Your debts do not reduce when you consolidate them, you only replace one or many debts with another one. Which will not be a good idea for over-indebted consumers.

While debt consolidation might be a good solution for consumers who are not over-indebted and want to make payments more manageable, it is not always a solution. So what are the alternatives? The main one is the process of debt review. This process takes into account all of the consumers’ debt and it establishes an affordable payment structure to get the consumer out of debt, rather than simply one loan.

This ensures that your monthly payments are a lot more affordable and also provides protection against credit providers who harass consumers. So if you are serious about getting out of debt, this might be the solution for you. You will feel supported in the bottomless pit of debt and you can look forward to a brighter financial future.