Everything you need to know about debt consolidation
Published Tue, May 10, 2011 Updated Tue, Feb 16, 2021
Managing finances is a necessary evil when you are faced with immovable debt. Debt consolidation is one avenue that an increasing number of people are turning to when considering how to sort out debt problems.
What is debt consolidation?
Debt consolidation is the process of taking out one large loan to pay off all other existing creditors. This has become a popular option as it takes the worry and hassle of managing various repayments throughout the month and leaves only one monthly repayment that is specifically designed to be manageable.
Two ways to organise debt consolidation
The first is by taking out personal loans yourself, negotiating with your current creditors for repayment discounts and paying off all other debt in full with the loan.
The other option is to contact a debt consolidation company to do all the hard work. They will contact your creditors on your behalf and negotiate the best repayment terms to reduce interest and outstanding debt over a set period of time. You then pay the debt consolidation company one figure each month and they distribute the money accordingly as and when it is due to your creditors.
Advantages of using a debt consolidation company
The major advantage of using a debt consolidation company is that you don’t have to be organised. You don’t need a credit score high enough to qualify for a normal loan and you don’t have to remember to make all your repayments at whatever times they are due throughout the month. By negotiating payment terms and discounts you could actually reduce the debt you owe overall making your monthly total repayment figure lower and more manageable.
Disadvantages of using a debt consolidation company
The distinct disadvantage of using debt consolidation company is in fact what makes it so attractive. All control of your debt is handed over to the consolidation company. While it is advantageous to not have to worry about forgetting to make a repayment to a creditor, you suddenly have no control over repayments and the debt consolidation company could make an error. Any errors affect only you and your credit score so before deciding on a company through checks should always be made.
Debt consolidation is not the quick fix solution that it is made out to be. While it is people who feel they have few options to deal with their debt, they are the ones who turn to debt consolidation, qualifying for a debt consolidation loan when you have a poor credit score is difficult or subject to high interest rates.
Interest rates can be as high as 22% and you also have to pay the debt consolidation company’s handling fee. So whilst you make think paying a lower monthly figure is positive it could actually cost you considerably more long term than if you tackled your debt yourself.