Published in Debt Solutions Guide on Friday, November 19 2004

Generally, a consolidation loan is usually recommended in cases of moderate debt problem where there is equity in your home, or where you can afford to make equal or higher monthly debt payments than you are currently making and your aim is to pay your debt off quicker.

Why choose a consolidation loan as a solution to my debt problem?

A consolidation loan is sometimes the most appropriate solution to your debt, but not always. Some companies advertise that they can offer a solution to your debt problem and will only ever advise you to take out a consolidation loan, whether this option is deemed the most suitable out of all the debt options or not.

Generally, a consolidation loan is usually recommended in cases of moderate debt problem where there is equity in your home, or where you can afford to make equal or higher monthly payments than you are currently making and your aim is to pay your debt off quicker. It is generally not an option if your debt problems are serious but the success of this route will depend on how much lower monthly payments will be with your consolidation loan and whether you are sure you will not take out any further credit using the sources that you pay off.

A consolidation loan can help with your debt problem in 2 ways:

• A consolidation loan can be taken to reduce the interest rate and increase the term of your debt, therefore leading to lower, more manageable monthly payments.
• The consolidation loan solution is a way out of debt quicker if you can afford to maintain or increase your monthly payments but wish to pay off your debt sooner.

The biggest problem with the consolidation loan solution is dealing with the temptation to take out further credit through the credit sources that are repaid with the consolidation loan. For example, a credit card may be paid off using the consolidation loan but you must be careful not to use the credit card again once credit is available on it again. It is always recommended that credit card and other ‘on tap’ credit sources (such as bank overdrafts) be closed completely as soon as your debt is consolidated.

Selecting a consolidation loan is usually dependent on the interest rate, the required term of the loan, and your credit status. If you have CCJ’s or an impaired credit record then certain options may not be open to you but a debt advice company can advise on the most suitable consolidation loan deals available to you.