Debt Consolidation – The Pros And Cons

Debt consolidation can be a life-line to those who are struggling with debt problems and don’t know where to turn.

Put simply debt consolidation is a loan that pays off your debt, leaving you with one outstanding balance to just one creditor with only one monthly repayment.

A debt consolidation company does all the hard work by contacting and negotiating with your creditors to reduce your interest rates and increase your payment terms. You pay the company one figure each month and they distribute this to your creditors.

The distinct advantage of debt consolidation is that your debt is organised. You know exactly how much it is you owe, how much you have to pay and for how long. You are taking a proactive approach by reducing your debt where possible through negotiating lower interest rates with your creditors.

However, there are also some distinct disadvantages to debt consolidation and it should never be regarded as a quick fix to debt.

Most people turn to the debt consolidation solution because they are struggling to manage repayments and it is likely that your credit score will reflect this.

Low credit scores will influence that interest rate you will be offered on a consolidation loan and it can sometimes be as high as 22%. Many debt consolidation companies also build into your monthly repayment a handling fee. Whilst your monthly payments may work out lower with a consolidation loan it is likely you will actually end up paying more.

With debt consolidation you are putting your financial future in somebody else’s hands. You are trusting them to negotiate the best terms for you and to forward payments to your creditors that will effect your credit score if missed.

There is just one important question you should ask yourself before contact a debt consolidation company.

Are YOU ready to take control of your finances?

If the answer is yes then give your creditors a call, explain your situation and start negotiating lower interest rates and longer repayment terms for yourself.

Work out a budget and know exactly how much you can offer to repay each creditor each month. Create a spreadsheet so you know what your balances are and what you have to pay each creditor every month. Set up standing orders with your bank so you don’t miss any payments and take control of your own financial future.

Guest post written by  Elizabeth Salutini of money saving tips website Personal Finance 4 All.