Published in Debt Advice Features on Thursday, October 12 2006

Is a consolidation loan a good idea? Consolidating may mean one lower monthly payment to only one creditor, a definite end to your debts and a lower rate of interest. However there are downsides which include it actually taking longer to pay off your debts, paying more back than you actually owe now, if it is secured against your property and you run into hard times you are risking your property, and if you only have one creditor it can make it harder to negotiate if you do run into difficulties.

Before deciding on a consolidation loan look at your income and expenditure to work out how much you can actually afford each month. If this is less than your payment to your loan then it is inevitable that you will run into difficulties again in the future and possibly run up the debts on the credit cards for example again. Could you borrow from relatives? Or even look to see if you are using the credit you have wisely. Could you move the debts from higher interest to lower interest debts? Try contacting your creditors to see if you can come to an arrangement with them, and possibly stop interest and charges.

If you do decide to consolidate look in detail at how much you will be paying back in total, how long this will take, what the monthly payments are and how much interest you’ll pay. It may also be worth investigating what would happen if you struggled with repayments, or if it is secured on your home, what the outcome would be if you do run into difficulty.