What Is Debt Consolidation?
Debt consolidation simply means taking out one new loan to pay off multiple existing debts. This new consolidated loan replaces your various credit cards, store cards, overdrafts, loans, and other unsecured debts.
Instead of juggling multiple payments and due dates, you’ll make one monthly payment towards your new consolidation loan. The aim is to simplify repayment, streamline finances and often get a lower interest rate.
Consolidation can make managing debt less stressful and easier to budget for. However, it also means taking on additional borrowing. It is crucial to understand the risks and responsibilities involved before proceeding.
Here are some key benefits and drawbacks of debt consolidation to weigh up:
- Simplifies finances with one monthly payment.
- Can allow you to lower the debt interest rate, saving money.
- Fixed repayment terms can provide structure.
- May allow payment holidays if needed.
- Consolidation fees can be expensive.
- Loan approval isn’t guaranteed.
- Secured loans and remortgaging put your home at risk if you can’t repay.
- Extending loan terms may increase interest paid.
- Missed payments can damage your credit rating.
Assessing if consolidation is right takes careful consideration of your unique circumstances.