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Is Debt Consolidation Actually Worth It?

Wondering if a debt consolidation loan is worthwhile? Consolidation Expert breaks down when a debt consolidation loan could be the right option for you.

Debt consolidation is a financial strategy that combines multiple debts into a single loan, ideally with a lower interest rate. It’s a tool that can simplify your debt management process and potentially save you money in the long run. But is it worth it?

Debt consolidation is often seen as a lifeline for those struggling with multiple debts. It offers a glimmer of hope to those feeling overwhelmed by various repayments and interest rates. However, like any financial decision, it’s not one to be taken lightly. It’s crucial to understand what debt consolidation is, the potential benefits, and the possible pitfalls. This understanding will enable you to make an informed decision about whether it’s the right path for you.

If you think a consolidation loan could be right for you, Consolidation Expert may be able to help. Our lenders offer consolidation loans which could combine multiple existing debts into a single loan with one monthly payment.

Representative 14.8% APR

We are a broker, not a lender.

Representative Example: Borrowing £15,000 over 60 months, repaying £355.28 per month, total repayable £21,316.57.

Total cost of credit £6,316.57.

Interest rate 14.8% (variable).

The lenders on our panel offer loans for 12-360 months, with rates from 4.7% APR to 42.6% APR.

The Representative Example is based on all loans paid out by lenders between 1st Jan 2022 and 31st Dec 2022.

What, Exactly, Is Debt Consolidation?

Debt consolidation involves taking out a new loan to pay off multiple debts, generally unsecured ones. In effect, multiple debts are combined into a single, larger loan, usually with more favourable payoff terms. These new payoff terms may include a lower interest rate, lower monthly payment, or both.

The concept of debt consolidation might seem simple at first glance, but it’s a process that requires careful consideration. It’s not just about taking out a new loan; it’s about effectively managing your debts and making a commitment to improve your financial health. It’s also about understanding the terms of your new loan and ensuring that they are more favourable than your current debts. Remember, the goal of debt consolidation is not just to simplify your debts but also to save money and improve your financial situation in the long run.

When is Debt Consolidation Worth Considering?

There are several situations where debt consolidation might be worth considering:

01. Lower Interest Rate

If you have a good credit score, you may be able to get a consolidation loan with an interest rate lower than what you’re currently paying on your existing debts. This can save you money over the length of your repayment.

02. Single Debt Payment

Managing multiple payment deadlines can be challenging and increase your risk of missing a payment. With consolidation, you can combine all of your debt into one loan with one monthly payment, making tracking and budgeting much easier.

03. Faster Debt Payoff

Credit cards don’t have a set timeframe to pay off the balance. You’re only required to make the minimum payment each month, which does little to decrease your total balance. A consolidation loan, on the other hand, has fixed monthly payments and a set payoff period, which can force you to pay your balance down more quickly than you might have otherwise.

04. Improve Your Credit Score

The more you pay down your debt, the better it is for your credit score. In addition, consolidation can also help your credit by decreasing your credit utilisation ratio. By opening a new line of credit and using it to pay off your other credit accounts, you bring those accounts to a zero balance. This frees up more available credit compared to your total credit lines, which can raise your score.

Potential Drawbacks of Debt Consolidation

While there are several benefits to debt consolidation, it’s also important to consider the potential drawbacks:

01. Fees

Some consolidation loans carry fees, including loan origination fees, closing fees, and annual fees. Be sure to take these into account when weighing how much money you stand to save by consolidating.

02. Qualifying for a Lower Interest Rate

Debt consolidation only results in a lower interest rate if your credit score is strong enough to qualify for the best rates. If your credit score is low, you may end up with an interest rate that’s not much better than your current rates. Add in any fees from consolidation, and your savings may be minimal.

03. Temporary Impact on Credit Score

Paying down your debt and managing a consolidation loan responsibly will boost your credit in the long term. But you may see a temporary decrease in your score because applying for a consolidation loan triggers a hard inquiry. However, your score should recover soon enough if you keep making timely repayments on your loan. But it’s still worth considering.

04. Affordability of the New Payment

Debt consolidation assumes you have the money to pay off your debt if you can arrange better terms. But if you can’t afford to pay much (if anything), you may be at risk of missing payments on your new loan, which could set you back further. If you’re struggling to find the cash to pay down your debt, it may be worth exploring other debt-relief options.

Conclusion

Debt consolidation can be a useful tool for managing and paying off debt, but it’s not a one-size-fits-all solution. It’s important to carefully consider your own financial situation, the terms of the consolidation loan, and other potential debt relief options before deciding if consolidation is the right path for you. Always remember to seek advice from a financial advisor or a debt consolidation expert to ensure you’re making the best decision for you.

Remember, at Consolidation Expert, we may be able to help you if you’re interested in consolidating multiple high-interest debts into one loan with a single monthly payment. Click below to get started – out lenders consider a wide range of credit scores.

Further reading

Read Is it Possible to Consolidate Short-Term Same Day Loans?
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Read Can I Consolidate Holiday Loans with Other Debts?
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Read How Can I Pay Off My Debts Faster?
Man running in front of debts with a stopwatch behind