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The pros and cons of debt consolidation

The pros and cons of debt consolidation

The pros and cons of debt consolidation

If you’re considering starting a business, applying for some finance, or just looking to simplify your financial affairs, then you may be considering whether debt consolidation is a step you should be taking.

Is debt consolidation right for me?

In simple terms, debt consolidation is bringing together all of your outstanding liabilities into a single credit facility. For example, if you have a number of different credit cards, you could transfer the outstanding balances into an unsecured loan (and close down the credit cards). Not only does this simplify the number of different lines of credit you are juggling, but it will most likely reduce the costs of your repayments, and save you money.

Debt consolidation doesn’t mean that you don’t repay the amount you originally borrowed, but it might save you money on interest and charges. It can also contribute to an improved credit score if it helps to demonstrate that you can manage your finances responsibly.

Choosing between secured and unsecured finance

If you are considering debt consolidation and assessing different debt consolidation companies, you’ll notice that you can get lower interest rates and charges if you opt for a secured loan when compared to an unsecured loan. Secured loans are viewed more favourably by financial institutions because they involve less risk – they are secured against an asset (such as property or a car) so that if you default on your loan repayments then the value of the asset could be used to offset the debt.

Unsecured loans aren’t supported by the security of an asset, and so the financial institution is making an assessment on whether to lend you the money based on your credit history and your disposable income.

There are pluses and minuses to both form of loans – while secured loans can help you achieve lower fees and charges on the amount that you need to borrow for debt consolidation, you are placing an asset at risk. If things don’t go to plan, then the financial institution may be forced to liquidate your asset (such as your car or your house) in order to recover their money. Unsecured loans avoid that risk of losing your assets, but they do come with higher costs, so you may find it difficult to meet your obligations, resulting in a negative impact on your credit score.

Debt consolidation is a great way to move forward with your financial plans for the future. By simplifying your affairs, and agreeing a new payment plan, you can close the chapter on some of your financial difficulties of the past and move forward with confidence.