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Debt Consolidation – Benefits and Disadvantages

The option of debt consolidation is the best option for you if you’re having a hard time making ends meet. But, like any other option for financial aid you should be aware of both the benefits and drawbacks of debt consolidation so you know what you’re getting yourself into.

So, we’ve created this short overview of the subject that explains the information you should be aware of about debt consolidation.

A debt consolidation loan has the following pros and cons that you should be aware of…

The debt consolidation option has many advantages and disadvantages when compared to other financial options.

They are usually favored by those looking to take control of their debts. For instance, in an option like an IVA the creditors who have the largest share of your debts must consent to the proposed solution. If you’re in need of more credit, you’ll usually have to get permission from your insolvency professional.

An unsecured debt consolidation loan gives you the benefit of greater freedom and is something you are able to easily manage.

There are many other benefits and negatives of debt consolidation

Advantages of debt consolidation

Financial simplification

The simplicity is probably the most significant benefit of consolidation of debt. By closing your accounts with your creditors leaving you with only one lender to pay (the lender who provides the consolidation loans). That means you’ll only need only one company to call for payment, one date to pay along with one interest rate you need to be aware of.

This will make your financial situation simpler to manage. At a minimum you will be able to enjoy more time not having to respond to telephone calls from all of your creditors.

Better for your credit score

It’s important to remember that at first an unsecured consolidation loan for debt will likely affect your score on credit. It’s because you’re obtaining a new account. But, when you pay your creditors, reduce the ratio of credit utilization and begin building an history of accountable repayment, you will see improvements on your score.

This is in contrast to other options for debt, which could be a negative effect to your credit scores for the duration of six years or longer.

A debt-free, fixed term

If you have fixed payments that need to be paid and when you’ll be free of debts. This isn’t the case for some options that will continue to be in effect until the situation is settled. If you have a debt management program for instance it’s not uncommon for them to remain in effect for at minimum ten years.

Debt consolidation disadvantages

It will not reduce or eliminate the debts you owe

Some debt solutions permit you to erase your debts or lower the amount you owe, this isn’t the case with consolidation of debt. The amount you owe remains unchanged. Instead, you’re paying different company.

All payments are required to be made

If the debt consolidation plan is approved, you’ll negotiate a repayment schedule. The repayments for the loan must be approved, or you risk not being able to pay the loan. While this could result in consequences like the possibility of legal proceedings, you could also are at risk of being declared bankrupt.

Might not include all of your outstanding debts

It is possible to use the debt consolidation loan to pay off all of your unsecured debts. Although some loans can help with expenses such as tax arrears on council taxes but not in the case of debt consolidation. In the end it is recommended to speak with an advisor on debt to ensure that you can repay all of your creditors.