Type ‘debt consolidation’ into Google and the chances are good you’ll get a lot of contradictory information, from links suggesting it is the root of all financial evil to ads that claim it is the solution to all your money problems.
Of course it’s not as simple as either the critics or supporters suggest. Debt consolidation isn’t for everyone, but may be a useful tool to get your financial affairs under control.
Before busting some of the myths about debt consolidation a good place to start is understanding what it is. The simplest explanation it that it involves taking out one loan in order to pay off a number of smaller debts.
Typically you would take out a longer-term loan to pay off a range of short-term debts such as store cards.
Critics argue that the only real advantage of doing this is that rather than having a whole lot of smaller creditors to manage, you have one large one.
While this is true, there are potentially some other benefits. Consolidation loans usually have fixed interest rates so it’s easier to budget and manage your financial affairs. Only having one loan to pay also means you’re less likely to miss payments, something that could impact your credit rating.
Consolidating your debt can also save money on service fees and debit-order costs. Depending on how the loan is structured it could also improve your cash flow by requiring smaller payments, over a longer period.
Another concern raised about consolidation loans is that because the loan is easier to manage and smaller repayments can free up some cash each month, consolidation encourages reckless spending.
While this may sometimes be true, people often take consolidation loans because they are trying to be financially responsible and manage their debt better.
Another myth has resulted from a perception that debt consolidation is only for people who can’t manage their money properly.
This simply isn’t true. Consolidation is a financial tool that’s used by businesses and many financially savvy people to simplify their financial affairs, save on administrative costs and free up cash.
If you are considering consolidation as a means of managing your debt, you can use this account consolidator tool to decide if it’s an option that might work for you.