How Could Debt Consolidation Reduce My Debt?

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Sunday, June 14th, 2009 Subscribe To Our Feed

If you are struggling to deal with multiple debt repayments, a debt consolidation loan could help you get your finances back on track, by reducing the amount you pay each month and making your finances easier to manage.

Of course, a debt consolidation loan is not appropriate for everyone’s circumstances - and for that reason it’s important to understand what’s involved, to help establish if it’s the right solution for you.

How a debt consolidation loan works
In short, a debt consolidation loan is a new loan that allows you to pay off your existing debts - effectively reducing several debts into one. You will then make single monthly repayments to your new lender.

A debt consolidation loan makes it possible to reduce your debt in two ways. Firstly, you can spread your new repayments out over a longer period than your original debts, meaning each payment is smaller. However, be aware that you may also pay interest for longer than on a shorter repayment period, and so the total amount you pay may be higher.

Secondly, you could reduce the overall amount of interest you pay, even if you do spread out repayments. If the interest rate on your new loan is lower than the combined APR of your original debts, your payments could be noticeably lower.

And even if this isn’t the case, some people simply prefer the convenience of only having to manage one payment each month. However, if your payments will not be reduced, you should carefully consider whether you will be able to meet these repayments in the medium-to-long-term.

How do I know if a debt consolidation loan is right for me?
Like any debt solution, you should always consider your ability to keep up with a debt consolidation loan. Reducing your monthly payments is all good and well, but if the repayments are still too high for you to realistically keep up on payments for the duration of the loan terms, then you may want to consider an alternative debt solution.

In general, a debt consolidation loan is best for people with multiple debts who feel they would benefit from either simplifying their finances or reducing their outgoings (or both).

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