Discover the main advantages and disadvantages of debt consolidation. The only debt solution which will not negatively affect your credit rating.

• Main debt consolidation advantages
• Main debt consolidation disadvantages

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Debt Consolidation Advantages

1. Your Credit Rating is not effected
Consolidation simply involves paying off a number of smaller debts with one larger loan. None of the older debt agreements are being broken as part of this process. These are paid off in full. Given this your credit rating will not be negatively effected in any way.

2. Your monthly payments are reduced to affordable amount
The monthly amount you pay towards your consolidation loan will be smaller than the sum of the payments of the old consolidated debts. This means that you should be able to make a significant saving each month.

BMD Tip: This is particularly the case with secured loans. These are normally paid over a much longer period than the debts that were consolidated. This means that the associated monthly payment will be much lower and easier to manage.

3. You will save a significant amount of interest charges
The interest you are charged on a consolidation loan is fixed. This is because you repay the loan over a fixed period of time. Overdraft, credit card and store card debts work differently. If you have an outstanding balance on your credit card you will continue to pay interest on this until the balance is repaid.

If you only pay the minimum credit card payment the balance will never be repaid. As such the amount in interest you pay will continue to go up and up. Given this if you use a loan to consolidate debts like your credit cards you will potentially save a significant amount in interest payments.

4. Quick to implement
A consolidation loan can generally be arranged swiftly meaning that monthly payments can be reduced fast meaning you get your finances back under control swiftly.

Debt Consolidation Disadvantages

1. You will have to pay back more than you borrow
If you take a loan to consolidate your debt you will be charged interest on the new loan. As soon as you take the loan you will owe more than the total value of the debts you have consolidated.

This is because the bank will add interest to the consolidation loan. For example, if you borrow £10,000 over 5 years at approx. 8% APR, you will end up repaying approx. £12,350 back at the end of the 5 year period.

2. Mortgage debt is secured against your home
If you consolidate debt using a mortgage or secured loan this then becomes secured against your property. This means that if you find yourself unable to repay the loan in the future your house will be at risk of repossession.

BMD Tip: Think carefully before you change unsecured debt into secured debt by consolidating with a mortgage or secured loan. Once this is done you then lose the right to try a different debt management solution if you are still struggling to pay the debt.

3. You are not forced to change your spending habits
Once you have taken a consolidation loan you are not required to live within a restricted living expenses budget. Your obligation is just to make the repayments on time. Other than that you are left to manage your money as before.

However using a secured loan to manage manage a debt problem will only work if you change the reason you got into debt. If you continue to use credit cards and spend beyond your means it is likely that your debt problem will just get worse.