Benefits and consequences of a debt consolidation loan

Debt Consolidation | Guide

If you're thinking about consolidating your debts with a loan, it's important to look at the benefits and consequences before making your decision. For some people, a debt consolidation loan is an excellent way to deal with debt. For others, it could create further difficulties.

Some of the benefits of debt consolidation loans:

  • Lower monthly payment because you’d be repaying your debt consolidation loan back over a longer period of time.
  • Simpler finances because you’d only have to make one payment every month. This should make managing your monthly budget easier.
  • Could reduce your interest rate if your debt consolidation loan has a lower interest rate than your current debts.

Some of the consequences of debt consolidation loans:

  • Potentially higher long-term cost if you repay your debt more slowly. By spreading out your repayments, you will pay interest for longer and could increase the total sum to be repaid, and it could take longer to become debt-free. You may also have to pay an arrangement fee for the loan.
  • Your property could be at risk if your loan is secured against it and you do not keep up your repayments. The consequences of falling behind become more serious if you take previously unsecured debts and consolidate them using a loan secured on your property.
  • You may not be able to borrow enough to consolidate all of your debts, which means another solution may be more suitable.
  • You may be tempted to spend the credit that becomes available again as a result of consolidating, for example on your credit cards or store cards. It’s important that you can comfortably manage your regular spending when you commit to your new loan payments so that you don’t have to use credit for the things you need, and that if you do decide to take out further credit in future, you can afford to keep up with the repayments.

Next: Will a debt consolidation loan affect my credit rating?

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