What Are The Advantages Of Debt Consolidation?

Debt consolidation can have a number of benefits including reducing your monthly outgoings, saving you money on interest or paying your debts off quicker.

In this guide we break down the pros and cons of debt consolidation and how to get the best deal.

What are the key advantages of debt consolidation?

There are several key advantages to consolidating your debts. They are:

Fewer bills to manage

The most commonly talked about advantage of debt consolidation is the concept of ‘one simple monthly payment’.

Simply put, consolidating multiple debts into one debt consolidation loan will reduce the number of payments that you have to account for each month.

The new loan is therefore easier to intuitively budget for, knowing a single amount that is coming out of your bank each month.

Reduced monthly outgoings

When you switch unsecured debts onto a secured debt consolidation loan, you could greatly reduce your monthly outgoings.

Our customers save an average of over £700 per month when they consolidate debt.

This can free up your finances and give you plenty of breathing space each month.

Secured debt consolidation loan rates are lower than those offered on credit cards and unsecured loans, which will reduce your monthly costs.

Try our debt consolidation loan calculator to find out how much you could save or read more on the differences between secured vs unsecured debt consolidation loans.

Build your credit and stop missing payments

If you’re struggling to keep up your repayments, there is a danger that you’ll soon start missing some monthly repayments. You may even be already missing some payments.

If this is the case, reducing your monthly outgoings will bring your outgoings back in line with your budget and allow you to rebuild your credit file.

This will increase your access to better finance deals in the future and could save you thousands when you come to remortgage.

Pay off debts faster

Reducing your interest costs will allow you to pay off your debts faster, if you keep your monthly payments at the same level.

This will reduce your interest costs further and can compound your savings.

Are there drawbacks to consider?

While there are lots of benefits to consolidating your debts, there are some drawbacks to consider. They are:

You may pay fees

When you take on a secured consolidation loan, there will be fees to pay, although they can generally be added to the loan.

These fees may be off-putting to some, although when you use a secured debt consolidation loan broker like ABC Finance, we consider the bigger picture. Our assessment of your requirements includes calculating the full cost of consolidating debts and help you to understand the impact of fees and how a consolidation loan impacts you in both the short-term and long term.

When you extend your finance term, you pay more overall

When extending the term of your borrowing, you reduce the cost on a monthly basis.

This sounds great, but there is also a downside to consider. Extending the term also increases the total cost of borrowing, as you’re paying interest for longer.

There is a fine balance to strike here. Extending the term for no reason will not be beneficial, but if you’re struggling with your outgoings each month, your monthly outgoings may be more important than the total cost of credit in the long term.

Should I consolidate my debts?

The decision to consolidate debts is an individual one based on your specific circumstances, including your income, outgoings and level of debt.

A good broker will help you to make this decision, so you don’t have to make it alone.

If you’d prefer to at least make an initial decision yourself, consider the above factors and weigh these up against the need to reduce outgoings.

Special considerations with secured debt consolidation loans

Whether you’re using a second charge mortgage or a remortgage, the lender will most likely do a stress test to ensure you can afford the new, higher mortgage payments. This stress test measures your debt-to-income ratio.

Another important consideration is that individuals who use debt consolidation loans must ensure they do not access new credit cards. The goal is to reduce your bad debt. While your outstanding balances on credit cards will be cleared and those cards closed, it’s very common for individuals to fall back into the same mistake and decide to apply for other credit cards afterwards.

Finally, while it may be tempting, do not borrow the maximum percentage on your home equity unless necessary.

Borrow only what is needed to eliminate your credit card and high-interest loans. This maintains your home equity while helping you lower your new monthly mortgage payment.