Is it wise to consolidate your debts?

1st October 2012

When you're heavily in debt and you hear about one of the heavily-promoted offers to consolidate all your loans, putting them all in one place with one provider, it can feel very tempting. After all, this is the kind of "simplifying" experience you yearn for when you have different debts here and there like car loans, credit card debt, and overdrafts etc.

But of course, the companies pushing you their products in this direction know you yearn for simplicity and the offers often aren't all they seem. Also, this can be a dangerous practice. Undoubtedly, consolidating your loans can make a lot of sense, but more usually it doesn't – particularly when a loan company is going to the effort of seeking you out directly. 

As with many things in life, the devil is in the detail. For example, if you're struggling to pay off credit card debts, then you should probably do all you can to stop doing so immediately. If you look closely at the APR figures on any credit card debt interest you're paying which isn't subject to any special offer low interest period, you'll quickly realise why this is.

Sometimes, an offset mortgage is a good way of consolidating debts for yourself, though the availability of this type of mortgage will depend on your financial position. If you have sufficient equity in your home and/or good earnings, then an offset mortgage may be a good idea to enable you to borrow a little more in order to clear all your other debts and concentrate only on the mortgage (on the presumption that the interest rate is lower than your other loans as would usually be the case).

If such a loan isn't an option for you, then it's definitely worth shopping around for the best consolidation loan you can find. Most consolidation loans are available at better rates than credit cards and many other forms of debt. But make sure you approach a reputable lender like Debt Free Direct.

Perhaps the main danger in consolidating your debt is a psychological one. As the consolidation loan should save you money on interest payments, simplify your debt and free you psychologically (which is unequivocally a good thing), the danger then lies in the elation you'll feel – and the temptation to start running up additional loans again. If this is a weakness in your own personality, then it's important to recognise it and take advice from qualified professionals and/or close and trusted friends, who can help steer you away from temptation.

A consolidation loan can be a very helpful tool; but it's vital to use it wisely.

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