Can Debt Consolidation Actually Work?

There are several advantages to merging your debts into a single consolidation loan. For many people might be appealing to have to make just one single monthly repayment in place of many repayments. Making lots of monthly payments towards a number of creditors in respect to a few different accounts is time consuming, specially when funds are limited and there is insufficient cash for everyone. You’ll have to select which debts really are ‘priority’ ones. Those you should take care of. With regard to the rest you simply must make do with whatever you can afford to pay, regardless of whether in some instances it is less than the contractual amount that you should be paying. One big advantage – whether perceived or real – is that you have just one single lender to take care of rather than many creditors. Managing your financial situation in addition to repayments can be simplified. It is also probable that your credit rating will get better specifically if you include all of your credit card accounts in the debt consolidation. Along with those benefits, the recurring repayment relating to the consolidation loan could be less than the sum of the repayments relating to the many different loans.

Why should this be? Just one particular contributing factor might be that the time period of the loan consolidation could possibly be (much) lengthier compared to different durations of the original loans. An additional point is that you might have consented to let the debt consolidation loan to be secured on your residence. More affordable monthly repayments are typically subject to one or both of those reasons. While the interest rate on the proposed debt consolidation loan may be lower than the rate you are paying on (some of) your debts currently, the full amount of money you will have to repay may very well be substantially greater on account of the duration of the term of the loan consolidation.

So what might not work out? If you are having difficulties to make your payments at present you need to make certain you will be able to comfortably make the loan consolidation repayments in a sustainable way and also for the full estimated duration of that loan. You’ll want to cease using the lines of credit which you have combined. For instance, you will need to chop up all the credit cards you possessed and stop using whatever 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 with the proceeds of the loan consolidation, you will notice that your ‘old’ creditors may want to do further business with you and make many ‘attractive’ credit promotions to you. You should refrain from these types of deals, if you wish to stop experiencing financial distress again.

One more downside of acquiring a loan consolidation is that you could possibly be asked to consent to secure the loan consolidation on your property. If you are cannot maintain the monthly payments (on the debt consolidation loan) you could suffer a loss of your property. Although you may get a low interest rate through agreeing to secure the loan on your house, the likely long term of the loan consolidation will mean that you give up some freedom relating to your home loan e.g. being mortgage-free when you actually expected to be or being in the position to retire early or whenever you decided to give up work.

Therefore, do think long and hard before you decide about debt consolidation as a solution for your financial difficulties. Look at whether other solutions could be more appropriate to your circumstances. For instance you could already be insolvent. If you are perhaps you may consider entering into an Individual Voluntary Arrangement (IVA) or petitioning for your own Bankruptcy (BCY). They are two personal insolvency processes that protect you from your creditors and which also have got the entire weight of the law behind them. Even if you are definitely not insolvent, you can look at entering into a Debt Management Plan (DMP) with your lenders. You can do this by yourself by attaining understanding with every one of your lenders regarding the way in which will pay back your debts to them. This is occasionally called a self administered DMP. Most DMPs nonetheless are administered with the assistance of specialized debt management firms with specialist knowledge in talking with lenders as well as in putting together DMPs between clients and their lenders and then administering these plans during a period of years and in certain instances over many years. Whatever you finally decide to do, do take advice. You should not think that consolidating debts is the solution to your situation until you have identify the additional alternatives that could be available and have thoroughly evaluated them.