If you have multiple debts that are piling up with repayments that are spiralling out of control the attraction of a debt consolidation loan is obvious. And don’t the companies that provide these loans know this, their adverts saturate daytime television and their adverts fill the tabloids, all with banner headlines extolling the virtues of their secured loan services. Behind the obvious and repulsive cynicism employed here is also poor financial sense.
Debt consolidation – flexible payments
In today’s world, with the plethora of loans available and flexible repayment packages, the old maxim of ‘never borrow your way out of debt’ can seem too rigid. A better phrase would perhaps be ‘never borrow more to get out of debt.’ It may seem like there is little difference between these two but that small difference is crucial.
Debt consolidation loans lend you the same amount as all your other debts combined, so it may seem like you are not borrowing more at all. However, with high rates of interest and reduced monthly repayments most debt consolidation loans are very long term. It may well be convenient to have only one monthly outgoing that is lower than the many you had before but if you are paying that every month for fifty years the total paid back is huge. And the loans are usually secured on your house so any defaults and you could lose your home. Strangely these points are not emphasised in the adverts that bombard us every day.
Never borrow your way out of debt?
The reason ‘never borrow your way out of debt’ is no longer a truism is that it is quite possible to shop around on the high street for a personal loan that will cover your existing debts. This can reduce the cost of borrowing and means that although your monthly repayments have not decreased by as much as a consolidation loan you will not be still be repaying well into your twilight years.
As with anything else a decision about debt consolidation requires consumers to be well informed so that they make the best decision for them and their specific circumstances. Unfortunately many debt consolidation companies have deals with unsavoury profit making ‘debt counsellors’ that will steer unwary consumers into deals that are entirely inappropriate. It is important to ensure, therefore, that customers make decisions based on relevant independent information from trusted sources and do no find themselves bounced into inappropriate loans that could result in home repossession.