A consolidation loan will allow you to bring together all of your debts into one easy to manage loan. Some people find that they are very useful, but others not so much. It is worth thinking about how they work so that you can consider whether they will be the right decision for you.
How does a consolidation loan work?
A consolidation loan will give you enough money to repay all of your outstanding debts and then allow you to repay them all in one loan. This can take away the hassle of remembering what you owe to who and allow you to manage it more easily in just the one loan. This sounds really good but you do need to be aware that there could be a problem with it. The interest on the loan could be a lot higher than you are paying on some or all of your current debts. It could be well worth adding up what you are paying in interest each month now and compare that to what you would pay on the loan. You might feel that it is well worth paying more because you will be able to manage your debt more easily, but you need be aware of the figures so that you can make that decision.
Would it benefit me?
As well as thinking about the cost of the loan, even if it is just a £1000 loan it is important to think about whether it will suit you. Although having just the one loan can sound really attractive and easy to manage, there are drawbacks. For example, if you used the loan to repay a credit card and overdraft, then you will still have that credit card and overdraft facility. As they are repaid you might be tempted to use them again. This will mean that you will be borrowing more money on top of your consolidation loan. This could end up with you getting lots more debt and being in trouble with not being able to afford the repayments.
We are all different though. If you know that this will not happen to you as you will have the self-discipline to not get any more debt until the loan is repaid then it should be fine. However, we never know when a financial emergency might be around the corner and that we might be tempted to use those loans that are available to us. Some of us will know that we are the sort of person that will take out the consolidation loan and then very quickly get into debt again. Some of us find it very difficult not to spend money and will do so if we have the chance. If you know that this is likely to be how you will behave then it could be sensible to leave your loans as they are as you will not have money available for you to spend. Then you will just have to try to repay each debt one at a time if you can. It can be difficult, if we are in the mindset that we like to spend money and feel that we deserve to buy ourselves things, to get out of debt. Getting some debt counselling might help someone who feels like this as it can be financially damaging. We can, of course, treat ourselves to some things once we are on top of our debt, but if we keep treating ourselves while we are still in debt then it can get really tricky.
Are there alternatives?
You may feel that a consolidation loan is too expensive or likely to cause you too many problems and so want an alternative. There are alternative solutions. It will mean that you will need to tackle the debts one at a time by yourself. You will need to come up with strategies on getting the extra money that you need to repay them. This might be from working extra so that you have a higher income or spending less, perhaps by comparing prices and buying cheaper things or by buying less. This can work well as you whittle down the debts one at a time and eventually become debt free. You will need to choose which debt to start with, it could be the one that has the highest interest costs or a small one so that you have the satisfaction of seeing the number of debts reduce. You will have to stick to the plan though and try to not start borrowing money again once they are all repaid.
This can feel like a more daunting task as you have more than one debt to tackle, but you will still have to repay the same amount of money. In fact, it might be cheaper to do it this way as consolidation loans could be dearer than the cost of your current debt. You might also be more motivated to stick to it when you know you have lots of debts to repay compared with just one. It can be very rewarding when you manage to repay one debt and it is gone and this could motivate you to work harder for the next one. When you have just one loan to keep slogging at this can feel like a huge task and it can be harder to find the motivation to repay it early. You will also only be repaying a very small percentage compared with a small loan where you will be paying back a bigger proportion.