Is debt consolidation safe?

21 September2009

For people with multiple debts who would like to reduce their monthly outgoings and/or simplify their finances, debt consolidation can often make good sense.

However, it`s important to remember that a debt consolidation loan is still a debt - and if you fail to keep up with your payments, you`ll face the same consequences as you would with any similar debt.

How debt consolidation can help

A debt consolidation loan is a new loan big enough to repay multiple existing debts. By paying off several debts with one loan, you are effectively `consolidating` them into one new debt.

You will then repay your debt consolidation loan in monthly payments to your new lender. If you choose, you may be able to reduce your monthly outgoings by arranging to repay the loan over a longer period of time than your original debts, which means you`d be making smaller instalments.

Keep in mind that repaying your loan over a longer period will also mean you`ll be paying interest for longer, so you may end up paying more in the long run. However, you could still save money if the interest rate on your debt consolidation loan is lower than the rates on your original debts.

Whatever the case, many people decide that they can accept paying a little more overall if it means their monthly outgoings are lower.

Is debt consolidation a `safe` debt solution?

The answer to this question depends on how you look at it. On the one hand, if you reduce your monthly outgoings and simplify your finances, there is less chance that you`ll miss any repayments.

However, there is always a chance that your circumstances could change - you might lose your job, for example, leaving you unable to make your debt repayments.

A debt consolidation loan is not a good idea if you are already struggling to meet your debt repayments. This is because it`s unlikely to reduce your monthly outgoings by enough to make a significant difference, so you might find yourself struggling to make your debt consolidation loan repayments.

If you are already struggling, another debt solution such as a debt management plan or an IVA (Individual Voluntary Arrangement) may be more appropriate.

For more information on debt consolidation loans and other debt solutions, click here or call 0800 195 2911.

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