If you have a debt problem then one of the options that you will probably have considered is debt consolidation, where payments to lots of different creditors are replaced by a single (lower) payment for a loan that is big enough to enable you to pay off all of your other creditors. The loan can be either secured or unsecured and can result in a dramatic reduction in your monthly payments.



Advantages of Debt Consolidation for Your Debt Problem

The main advantage is the reduction in your monthly payment for all of your debts. It is very important to prepare a realistic budget to make sure that your new reduced payments are affordable. Consolidation also makes your total debt situation clearer, i.e. you can't fool yourself about the true total of all your debts. There is an administrative benefit to having only 1 monthly payment instead of lots of little ones, and if you had got to the stage of defaulting on any payments then the resulting letters and calls should stop when you pay off your account using the money from your new loan.

Disadvantages of Debt Consolidation

If you use it as a debt solution then you must make sure that you have sorted out the original problems that caused you to get into debt in the first place. If you don't, you will quickly find that you have a debt consolidation loan AND lots of other debts, which would make consolidating your debt completely pointless and is a path that leads to severe debt problems and possibly bankruptcy.

If you take out a loan secured against your home (and I would usually advise against it) then you are making it much more likely that your home will have to be sold in the future. Unsecured creditors cannot usually force you to sell your home, whereas secured creditors can.

If you do enter a formal debt management solution after consolidating, you will find that taking on an unsecured loan over a longer period than the original debts will effectively increase the amount of debt that you have. This makes it harder to get an IVA agreed with your creditors or extends the period of time that a debt management plan will take to clear your debts. This is because most debt solutions calculate your outstanding debt using the formula - Debt = Monthly Repayments * Number of Repayments left, e.g.

Credit card debt of ?1,000 would be considered simply as ?1,000 in an IVA or debt management plan. However if this credit card debt was payed off using an unsecured loan then the debt for IVA purposes would be (for a 7-year loan) 84 x repayment (roughly ?22) equals ?1,848.

Conclusion

Debt consolidation can be a useful tool on the journey towards a debt-free lifestyle. However you need to be certain that you have the discipline to keep paying the new loan and not create any more debts. If your income does not realistically enable you to pay the cost of your loan then there is little point taking it out. It will make the inevitable process of sorting out your debts properly much harder in the end.