When debt consolidation can become a problem

Debt consolidation is a debt solution that has both a good side and a bad side to it. Over recent years many consumers with a range of high interest debts have benefited from this type of solution, but there are also those that have sunk into an even worse situation after consolidation their debts. Debt consolidation can be an extremely valuable financial tool in the right hands, but it can also lead to increased debt and financial stress when abused.

What is debt consolidation?

Debt consolidation is a debt management solution that has been used for years by many consumers that want to ease financial management and reduce monthly outgoings. This is a process whereby you take out a loan in order to pay off your smaller loans and debts. This may seem like a pointless process but it can actually prove invaluable. With the right debt consolidation loan you can reduce the amount that you have to pay out each month by paying off higher interest debts such as credit and store cards with a lower interest loan. You will also have just one repayment to deal with each month rather than several, and this can make managing your finances far easier and more manageable.

A number of lenders offer debt consolidation loans, and many will pay off your existing credit on your behalf by taking the account details of your existing debts off you. All this means is that your debts switch from a number of creditors to one creditor and just one repayment. By finding a consolidation loan that offers a competitive rate of interest you could save money on the amount that you repay each month as well as the amount that you pay in interest overall, as many debt consolidation loans boast competitive rates whereas many store and credit cards are linked with notoriously high interest rates.

Potential problems with debt consolidation

There are no actual problems with debt consolidation itself, as this can prove a great way to ease financial stress and reduce the amount that you have to pay out each month. However, the problems can occur when debt consolidation is used by the wrong person. The key to successful debt consolidation is having willpower, and without this you could find that debt consolidation leaves you in an even worse position that you were in before you consolidated your debts. The first thing to consider is affordability. You need to make sure that you keep up with repayments on your consolidation loan in order to avoid bad credit. However, if your consolidation loan is secured in nature this is even more important – if you fail to keep up with repayments on your debt consolidation loan you could end up losing your home, which would not have happened had you defaulted in repayments on your unsecured loans and cards.

The other downfall, which many people fall victim to, is the ability to run up debt again once you have consolidated your debts. For example, if you pay off your store and credit cards using debt consolidation you will be left with clear balances on your cards. It can be all too tempting to then run up balances on your cards again, and this means that you will accrue your original debts again and you will have to make payments on your debt consolidation loan, putting you in even deeper debt. You might then go on to top up the consolidation loan and repay the cards for a second time, and then spend on them again. This could go on and on, and is in fact one of the ways in which many people find themselves in spiralling debt.

It is therefore essential for anyone that is considering debt consolidation to make sure that they intend to pay off their debts and then resist the temptation to run them up again. If you have used your consolidation loan to repay cards, for example, you should not just tear up your cards, as they can easily be reordered and used. Instead you should close down your card accounts altogether, thus rendering you unable to spend on them without having to apply all over again, which can be a successful deterrent. It might be an idea to keep just one low limit credit card for emergencies only.

By exercising responsibility and being sensible with debt consolidation you could really ease the problems associated with debt management. With just one repayment to make and lower monthly repayments available you can reduce your chances of missing repayments and making late payments, which can also reduce the chances of your credit rating being adversely affected.