Debt Consolidation – Benefits and DisadvantagesDebt consolidation can be a great solution but you probably want to know the pros and cons so you can understand what you’re getting into.
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:
Can I apply for debt consolidation?
Applying for debt consolidation couldn’t be easier, just click the button below and you’ll be directed to our simple application form. With just a few clicks, we can identify whether this solution could benefit you:Get Debt Consolidation
APRs from 5.8% to 89.9%
We are a broker, not a lender.
Unsecured Loan Representative 69.9% APR
Borrowing £7,500 over 36 months, repaying £502 per month, total repayable £18,083. Total cost of credit £10,583. Interest rate 69.9% (variable). The lenders on our panel offer loans for 12-60 months, with rates from 5.8% APR to 89.9% APR. The Representative Example is based on all loans paid out by lenders between 19th Apr 2022 and 23rd Dec 2022.
Secured Representative 11.7% APR
If you choose to add fees to the loan: Assumed borrowing of £25,000 over 120 months, plus a broker fee of £2,500 and a lender fee of £250 would result in monthly repayments of £345.55, the borrowing rate is 8.6% (variable), the APRC is 11.7% (variable), total charge for credit £16,466.00 and the total amount payable £41,466.00. You can opt to pay the lender and/or broker fees upfront, your adviser will discuss these options with you.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured on it. All rates vary subject to loan amount, loan type and status. Repaying your debt over a longer period of time may increase the amount you pay.