What Does a Debt Consolidation Loan Cover?

What Does a Debt Consolidation Loan Cover?

by David Redmond on 20 Jan, 2011

Debt consolidation loans can often seem like some sort of miracle cure for your debt related ills. That is not what they are, and they should not be thought of as a solution for you if you are struggling to make your repayments. What they do is make your repayments simpler, and perhaps save you money in the long run.

What is a Debt Consolidation Loan?

A debt consolidation is no different to any other loan. What makes it a debt consolidation loan is the way you use it.

You take out a loan to cover the cost of paying off all your existing debts, plus any charges for paying them offer early. This means that instead of having a number of monthly repayments, you just have one. With early pay off charges you could end up paying more for your debt overall, but it will make it significantly easier to budget.

What About Interest?

The interest rate of your debt consolidation loan will play an enormous part in how much it will benefit you. If you manage to get a lower interest rate than your existing loans then you could well save money in the long run.

Otherwise, although extending the life of the debt in exchange for lower monthly repayments may help in the short term, but end up costing you more in the long run due to interest.

Is a Debt Consolidation Loan For Me?

If you’re looking to simplify your repayments, reduce your monthly payments or perhaps save money in the long run then a debt consolidation loan could be worth investigating. If on the other hand, you’re struggling to pay back your debt and can’t see a way out, a debt consolidation loan is likely to only delay the problem and may burden you for even longer. If this is you, consider alternatives such as debt management plans or an IVA (Individual Voluntary Arrangement).

About the Author

David Redmond

David Redmond is a Partner of Don Gilliard Finance Group. He is a fee-only, independent financial advisor and financial planner. For over 15 years, he has been helping individual investors and their families realize their investment goals.