Does Consolidation Actually Work?
There are some advantages to consolidating your debts into one consolidation loan. For many people it is enticing to have to make just one monthly payment instead of many. Making multiple payments to a variety of creditors in respect of a number of different accounts is time consuming, particularly when funds are tight and there is not enough money to go around. You have to decide which debts are ‘priority’ ones. These you must pay. For the rest you simply have to make do with whatever you can afford to pay, even if in some cases it is less than the contractual amount that you should be paying. One big advantage – whether perceived or actual – is that you have just one creditor to deal with rather than many creditors. Managing your finances and payments 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 can even be less than the sum of the repayments on the multiple loans.
Why should this be? One reason might be that the length of the debt consolidation loan could be (substantially) greater than the different terms of the former borrowings. An additional point is that you may have decided to allow the debt consolidation loan to be secured on your property. More affordable monthly repayments are normally based around one or both of these conditions. Although the interest rate on the planned consolidation loan could be lower than the rate you are repaying on (many of) your debts at this point, the full sum you will have to pay back may be significantly increased as a consequence of time-span of the term of the loan consolidation.
So what can go wrong? If you are finding it difficult to make your monthly payments at present it is advisable to make certain you will be able to easily make the loan consolidation repayments in a sustainable way and for the entire estimated duration of that loan. You should quit utilising the lines of credit that you have combined. For instance, you will need to chop up all the credit cards you possessed and stop using any overdraft facilities or other credit facilities which probably contributed to your financial hardships in the first place. Once you have repaid all your accounts and credit cards using the funds of the debt consolidation loan, you will notice that your ‘old’ lenders may want to do more business with you and make all types of ‘attractive’ credit promotions to you. It is best to refrain from these kinds of promotions, if you wish to stop having financial problems again.
Another disadvantage of taking out a consolidation loan is that you may be persuaded to agree to secure the consolidation loan on your property. If you are unable to keep up the repayments (on the consolidation loan) 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 or when you had planned to retire.
So, do think long and hard before you decide on debt consolidation as a solution for your financial difficulties. Consider whether other options may be more appropriate to your circumstances. For example you may already be insolvent. If you are you might consider entering into an Individual Voluntary Arrangement (IVA) or petitioning 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 might consider entering into a Debt Management Plan 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 Debt Management Plan. Most Debt Management Plans however are administered with the assistance of specialist debt management companies with expertise in negotiating with creditors and in setting up Debt Management Plans between consumers and their creditors and then administering these plans over a period of years and in some cases over many years. Whatever you ultimately decide to do, do take advice. Do not assume that debt consolidation is the answer to your situation until you have become aware of the other options which may be open to you and have fully considered them.
Battling with personal debt may end in you needing to consider Debt Consolidation. Find out about Debt Consolidation Loans along with the other alternatives to consolidating your debt is.