Does Consolidation Actually Work?

There are several things going for bringing together the money you owe into a single debt consolidation loan. For most people might be appealing to begin to make just a single payment on monthly basis instead of many repayments. Making a multitude of monthly payments towards a variety of creditors in respect of a few different accounts is time consuming, especially if cash is stretched and there is not enough money for everyone. You will need to determine which obligations really are ‘priority’ ones. Those you need to take care of. With regard to the rest you simply need to make do with whatever you have enough money to repay, regardless of whether in some cases it is lower than the contractual amount that you should be paying. A big advantage – whether imagined or real – is that you simply have just one single lender to handle instead of many creditors. Dealing with your finances as well as repayments will be made easier. It is also probable that your credit ratings may get better particularly if you bring in your complete credit card accounts in the debt consolidation. On top of these advantages, the recurring monthly payment on the consolidation loan could even be below the total of the repayments on the variety of loans.

Why should this be? One contributing factor could be that the time period of the debt consolidation loan could possibly be (substantially) greater compared to different durations of the primary loans. An additional issue is that you could possibly have consented to let the debt consolidation loan to be secured on your property. Decreased monthly repayments are generally based on one or both of these conditions. While the interest rate on the planned consolidation loan may be lower than the rate you are repaying on (many of) your debts currently, the whole sum you will need to pay back may be significantly greater simply because of the length of the term of the debt consolidation loan.

So what can go wrong? If you are struggling to make your repayments at present you need to ensure that you can comfortably make the consolidation loan payments in a sustainable way and for the full projected term of that loan. You need to stop using the credit lines that you have consolidated. For example, you need to cut up all the credit cards you had and stop using any overdraft facilities or other credit facilities which contributed to your financial difficulties in the first place. When you have paid off all your accounts and credit cards with the proceeds of the consolidation loan, you will find that your ‘old’ creditors may want to do further business with you and make all kinds of ‘attractive’ credit offers to you. It is best to resist such offers, if you want to avoid struggling again.

Yet another disadvantage of getting a consolidation loan is that you could possibly be persuaded to consent to secure the debt consolidation loan on your property. Should you be unable to maintain the repayments (on the loan consolidation) you may lose your property. Whilst you may obtain a low rate of interest by agreeing to secure the loan on your house, the probable long term of the loan consolidation will mean that you give up some flexibility with regards to your home loan e.g. being mortgage-free when you actually expected to be or being able to retire early or when you decided to cease working.

So, do think long and hard before you decide on debt consolidation as a solution for your financial difficulties. Consider whether other options may be more appropriate to your circumstances. For example you may already be insolvent. If you are you might consider entering into an Individual Voluntary Arrangement (IVA) or petitioning for your own Bankruptcy (BCY). These are two personal insolvency processes that protect you from your creditors and that have the full weight of the law behind them. Even if you are not insolvent, you might consider entering into a Debt Management Plan with your creditors. You can do this yourself by reaching agreement with each of your creditors as to how you will repay your debts to them. This is sometimes called a self administered Debt Management Plan. Most Debt Management Plans however are administered with the assistance of specialist debt management companies with expertise in negotiating with creditors and in setting up Debt Management Plans between consumers and their creditors and then administering these plans over a period of years and in some cases over many years. Whatever you ultimately decide to do, do take advice. Do not assume that debt consolidation is the answer to your situation until you have become aware of the other options which may be open to you and have fully considered them.

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