Debt Consolidation – Benefits and Disadvantages

Debt consolidation can be a great option if you’re struggling to make ends meet. However, similar to any financial solution, you probably want to know the pros and cons so you can understand what you’re getting into.

Therefore, we’ve put together this brief guide on the subject – which details what you need to know about debt consolidation.

Debt consolidation programs pros and cons – What you need to know

Debt consolidation has several pros and cons compared with other financial solutions.

They are frequently preferred by those who want to reclaim control over their debts. For example, with a solution such as an IVA, the creditors which owe most of your debt must agree to the solution. Furthermore, should you require additional credit, you’ll typically need to seek permission from your insolvency practitioner.

A debt consolidation loan has much more freedom – and it’s something you can pretty much manage yourself.

Here are other advantages and disadvantages of debt consolidation:

Debt consolidation advantages

Simplifying your finances

Simplicity is perhaps the biggest advantage of debt consolidation. By closing accounts with your creditors, you’re left with one lender to repay (the consolidation loan provider). This means you just have one organisation to contact, one payment date, and one interest rate to know about.

This should make your financial situation much easier to manage. At the very least, you should have more free time from not having to answer phone calls from all your creditors.

Better for your credit score

It’s worth noting that, initially, a debt consolidation loan will probably harm your credit score. This is because you’re taking out a new line of credit. However, once you repay your creditors, decrease your credit utilisation ratio, and start building up a history of responsible repayment, you eventually should see improvements in your credit score.

This is different than some debt solutions where these can potentially have a negative impact on your credit score for six years or more.

If you already have poor credit, consider taking a look at our debt consolidation loans for bad credit page.

More money in your account each month

Get a good deal on a consolidation loan, requiring less-expensive payments each month, and you should have more money left over to focus on the important things in life. As a broker, we’ll help ensure you get the best deal possible.

A fixed end to debt

With fixed payments which need to be made, you’ll know exactly when you should be free of your debts. This isn’t true with some solutions which can continue until your situation is resolved. With a debt management plan, for example, it’s not unheard of for these to be active for at least ten years.

Debt consolidation disadvantages

It won’t reduce – or write off – your debts

Although some debt solutions will allow you to write off your debts – or reduce how much you owe – this isn’t true when it comes to debt consolidation. The amount you owe is unchanged. Instead you’re just paying a different organisation.

Payments must be made

If debt consolidation is approved, you’ll agree a repayment schedule. Payments on the loan must be approved or you run the risk of defaulting on the loan. Although this may carry consequences such as legal action, you also run the risk of being made bankrupt.

May not include all your debts

You can use a debt consolidation loan to repay virtually all your unsecured debts. Whereas some solutions can cover expenses such as council tax arrears, this isn’t true with debt consolidation. As a result, you should speak with a debt advisor to ensure a consolidation loan can repay all your creditors.

Where can I find out more about debt consolidation?

We hope this guide has helped shed light on the benefits and disadvantages of debt consolidation. If you want to find out more information, you may wish to consider the following guides: