Generally speaking the first thing that you will consider if you are struggling to pay your debt is getting a consolidation loan. This can be used to pay off a number of smaller debts and reduce your monthly payments. It is also likely that the interest you are charged for a consolidation loan will be less than that which is being added to your store and credit card accounts.

However despite the advantages there are a number of pitfalls with consolidation. Not least is the issue of getting a loan if you have a poor credit rating. We consider these and explain when using a Debt Management Plan (DMP) might be a better option.

What are the problems with a Consolidation Loan?

The first problem is you may find it difficult to get a consolidation loan. If your credit rating is already poor because of missed payments in the past, this could be enough to prevent you from being able to borrow.

The next thing to consider is that consolidation will only work if all of your old debts are paid in full. If they are not because you cannot borrow enough, you will be left with both the new loan payment and some additional monthly payments which may still be difficult to manage.

You must also make sure the new consolidation loan payment is affordable. You should review your income and expenditure budget and make sure your disposable income is sufficient to cover the payments. If not, then you will still be forced to supplement your income by using your overdraft and credit card each month and your debts will continue to get worse.

Should you start a Debt Management Plan?

If having considered the problems associated with getting a consolidation loan a better option for managing your debt is to start a Debt Management Plan. This does not involve borrowing more money. Instead it is an agreement with all of your creditors to reduce the amount you pay to them each month to fit within the budget you can afford.

The advantage of debt management is that it gets you back in control of your payments and means that you no longer have to keep borrowing more each month to cover all of your expenditures.

However there are some disadvantages. The first is that your credit rating will be affected. It may also take a very long time to pay off your debt using debt management. You still owe all of the money and paying at a reduced rate each month can only serve to extend your payment period.