Econ Grapher

Debt Consolidation

What is debt consolidation?
Whether you're struggling to repay your debts or just looking to make them easier to manage, you may find a debt consolidation solution useful.

The term 'debt consolidation' can refer to two things. The first is a debt consolidation loan - which you can use to repay multiple unsecured debts in one go, leaving you with just one. The second definition can refer to any debt solution that allows you to repay several debts with one monthly payment. Of course, this includes a debt consolidation loan, but not all solutions involve taking on debt.

Here, we're going to look at the term 'debt consolidation' when it refers to any debt solution that allows you to clear your debts by making one monthly payment.

Debt consolidation: what are the advantages?

There are several benefits when it comes to consolidating your debts. To name just a few:

You'll only have one payment to make per month

You'll only have one monthly payment to make. This can help to make your overall finances much easier to manage, as you won't have as many outgoings to budget for.

You could pay less each month

Some types of debt consolidation - like a debt management plan or an Individual Voluntary Arrangement (IVA) - are designed to lower the amount you pay each month to a level you can afford, since you can't keep up with your payments as they stand.

If you can afford your debt repayments as they stand, but would just like some extra money each month for other costs, a debt consolidation loan could help. It's designed to repay several unsecured debts in one go, after which you'll repay the loan to your new lender. You could arrange to repay your loan over a longer timeframe than your original debts - which can significantly reduce the amount you are required to pay each month.

Debt consolidation: what are the disadvantages?

Debt consolidation can have its disadvantages. For example:

Your credit rating may be affected

If you're arranging to repay your debts through a debt consolidation solution such as debt management or an IVA, it means you'll be defaulting on your original agreements. This will be shown on your credit report for six years, affecting the cost and/or availability of credit for this time.

This won't happen if you take out a debt consolidation loan (providing you're able to repay it!).

You may pay more in the long run

If you have your monthly payments lowered, it's likely that you'll be repaying your debt for longer - which means you'll be paying interest for longer too. This can (if interest isn't frozen on your debts) increase the amount you'll pay in the long run.

This won't happen if you successfully complete an IVA, because the portion of the unsecured debt you can't actually afford to repay will be written off.

Sources and further reading:
Think Money

Graph Library:
n/a

Original Source: http://www.econgrapher.com/encyclopedia-debtconsolidation.html

 Back to the Econ Grapher Encyclopedia

Bookmark and Share