Drowning in multiple debts – can debt consolidation save or sink you?

If you find yourself drowning in multiple debts, a debt consolidation loan can seem like the solution to give you some room to breathe. Consolidating all your debts into one can simplify your repayments and potentially reduce the overall interest you pay. However, before you decide to go down this path, it’s really important to examine both the advantages and disadvantages.

Here’s a breakdown to help you make an informed choice, as well as my thoughts on these loans as a way of dealing with debt:

But first, let’s get clear on what Debt Consolidation Loans are about: A debt consolidation loan merges various debts – think credit card balances, personal loans – into a single loan. This means you’ll only have to manage one repayment to one lender, which could lead to lower interest payments and easier debt management. The key point is, we are talking about consumer debt here. Money borrowed to fund consumption and lifestyle, as opposed to debt incurred for investment purposes.

Pros of Debt Consolidation Loans:

Streamlined Repayments: no more juggling multiple payments each month; with a consolidation loan, you’ll only need to make one monthly repayment, simplifying your finances.

Reduced Interest: By consolidating debts into a single loan, you’ll likely benefit from a lower interest rate compared to the rates on your individual debts. This could result in significant savings over time, especially if you’re dealing with high-interest debts like credit cards.

Potential Credit Score Improvement: Paying off high-interest debts with a consolidation loan can positively impact your credit score by reducing the number of debts you have and demonstrating responsible financial behaviour.

Faster Debt Repayment: With a consolidated loan, you may be able to pay off your debts sooner, especially if you were previously making only minimum payments on multiple debts.

Cons of Debt Consolidation Loans:

Risk of Further Debt: Consolidating debts may free up credit on existing accounts, tempting you to take on new debt. To avoid this, it’s crucial to address the root cause of your debt accumulation – your behaviour.

Fees: Debt consolidation loans often come with application fees, annual fees, and other charges. These fees can add up, so it’s essential to factor them into your budget and when comparing the options.

Impact on Credit Score: Applying for a new loan could temporarily lower your credit score, even if consolidation ultimately improves it in the long run.

Risk of Asset Loss: If you opt for a secured consolidation loan, such as using your property or other assets as collateral, you risk losing these assets if you default on the loan.

Is a Debt Consolidation Loan Right for You?

Ultimately, the decision to pursue a debt consolidation loan depends on your own unique financial circumstances. Take the time to weigh the pros and cons carefully before making a decision. If a consolidation loan aligns with your financial goals and needs, it could be a valuable tool in your journey toward financial freedom.

Final thoughts:

My two cents worth on these loans, is that they are a temporary spot-fix for dealing with the problem of debt. Yes, they can help you to get on top of repayments initially, but without addressing the behaviour that got you into debt in the first place, it’s really just a short term band aid at best.

To get out of debt faster, and stay that way, you need to CHANGE your behaviour and relationship with money, first and foremost.

You also need to know your NUMBERS. How much money you have coming in, and how much you have going out. What are your fixed expenses, discretionary expenses, how much does it cost you to live now and how much does your ideal lifestyle cost? What do you need to allocate to saving, investment and debt repayments to get you there in your desired timeframe?

If you want to understand more about your money behaviour and how to know your numbers, get in touch to find out more about my 1:1 Coaching Services and financial education courses [email protected]

NEW: Cashflow Accelerator Course Intake starting soon – 4 weeks to create your ultimate personal budget for creating wealth and 10x your savings potential.

In health & wealth,

~ Rebecca

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