Debt consolidation may seem like the perfect method of debt management but as with all forms of debt management it does have its drawbacks as well as its benefits. It’s important that you understand how debt consolidation will affect you now and in the future before making any applications, as options such as debt agreements and personal insolvency agreements stay on your credit file for years to come.
The benefits of Debt Consolidation
The benefits you get from debt consolidation will depend to an extent on the type of debt management plan you opt for. In general though, you should benefit from the following at the very least:
- Lower monthly repayments – The main objective when it comes to debt consolidation is to lower the amount you pay towards your debts each month and so all forms of debt consolidation do achieve this. The actual amount you save each month will depend on a lot of factors and admittedly it might not be a life-changing amount. It should provide you with a bit more money to live on each month though and this is a definite benefit.
- One, single payment each month – Once you consolidate all your debts into one you’ll only have one payment to remember each month. Not only will this decrease the likelihood of you being charged late payment or missed payment fees because you forgot a due date it also let you know exactly where you stand in terms of your outgoings each month. For example, if your consolidation loan or debt agreement amount is set at $150 per month then this is all you have to find. It will never vary.
- No more negotiating with creditors – This benefit is particularly pertinent if you are currently struggling to pay your debts and you have creditors chasing you for money. Both debt agreements and personal insolvency agreements are put into place through an intermediary, often known as a debt agreement administrator. Your administrator negotiates everything with your creditors and once you have made the decision to present a proposal to your creditors they can no longer contact you for money directly.
- Debt free sooner than expected – Whether you decide to take out a debt consolidation loan or you enter into a debt agreement/personal insolvency agreement you’ll always become debt free sooner than if you remain paying the debts you have now. It’s no secret that credit card balances takes an average of 9 years to pay off if you always pay the minimum amount due and no more. This means that even if you have a debt consolidation loan over the maximum of 7 years you’ll still be debt free sooner than if you stick with your credit cards, and you’ll save a huge amount in interest payments at the same time.
- Fewer defaults or missed payments on your credit history (consolidation loan only) – All missed or late payments on a credit card account, or a bank loan account for that matter, are automatically logged in your credit file, bringing your score down. Sometimes however the due date for a payment is just a few days before pay day and as a result you simply don’t have the funds available to pay on time. To lenders who may look at your credit file in the future this will look like you are a risk for payment though, and it may be that you are turned down for important finance e.g. a mortgage, when you need it. By combining all of you debt commitments into one loan you are much less likely to miss a payment, and as a result your credit history will stay clean for a lot longer.
- You control your debts – Consolidating all of your unsecured debts into one single debt puts you back in control of your money. You know exactly what you are required to pay each month, when you’ll be debt free, how much you have spare to live on each month and when your payment will leave your bank account. This will not only make life a lot easier, it will also help your to budget your money throughout the week or month.
The Drawbacks of Debt Consolidation
Even though the benefits mentioned above are very appealing you must remember that there are also drawbacks to debt consolidation. These drawbacks include:
- The potential to fall deeper into debt (debt consolidation loan only) – The main worry with regards to using a debt consolidation loan to clear your credit and store cards is that they are then free to use again. With this in mind you must cancel your credit and store cards as soon as the balances are cleared…even though the temptation to keep just one will be there. Running up your credit card debts for a second time could put you in more debt than a debt consolidation loan can fix, in which case one of the more severe types of debt management will be required.
- Defaults on your credit history – Debt agreements, personal insolvency agreements and bankruptcy all remain visible on your credit history for 7 years. During this period you will find it almost impossible to get approval for any form of credit, from a $50 overdraft to a mortgage for a home. You need to think about your potential future during the next 7 years when you decide on a debt consolidation solution, as it may be that you have plans to get married, buy a home and settle down. Some of this may not be possible if your credit history shows you are in, or were in, a debt agreement at some point so think carefully before making any big decision.