A debt consolidation loan is a new loan large enough to repay all your unsecured debts in one go, leaving you with one monthly payment to make rather than several.
If you have a number of debts to several creditors, and/or would like to reduce the cost of servicing your unsecured debts, then a debt consolidation loan might help.
Advantages of debt consolidation
Firstly, if you are consolidating high-interest debts, such as store cards/credit cards, then you may be able to save money in interest (if, for example, your store card has an interest rate of 18%, but the debt consolidation loan has an interest rate of 9%, then your debt won't grow as fast).
Secondly, with a debt consolidation loan, you can spread your repayments out over a longer period of time than your 'old' debts - and lower your monthly outgoings. However, in doing this, the debt will take longer to repay than it would have done under the original agreement, so you might pay more interest in the long run (although this will depend on the respective interest rates).
Is debt consolidation always the best choice?
Depending on your situation, debt consolidation may not be the best way for you to reduce your debts.
For example, if you can't afford to repay your debt in a reasonable time, then you may find a different debt solution is more appropriate, such as an IVA (Individual Voluntary Arrangement).
And debt consolidation may not be suitable if you wouldn't be able to consolidate all your unsecured debts - or if you don't have a reliable income.
Author : John Brisbane
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As with any debt solution, it is important to weigh up the advantages and disadvantages of a debt consolidation loan before making a decision. If you are unsure as to whether a debt consolidation loan would be right for you, you should contact a professional debt adviser.
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