Consolidation

This is a question I often get asked: “Should I consolidate my debts into one single payment?”

To be honest, there is no easy answer.  There are pros and cons to doing this and I’ll go through them briefly here:

Pros:

Smaller monthly payment.

Often have lower interest than credit card debts.

Can determine a finite amount of time in which your debt will be paid off (unlike credit cards.)

Can reduce the overall cost of the borrowing.

Cons:

Can make you feel like you have done something to reduce your debt when in reality you haven’t.

Does not address the root cause of the debt.

Does not provide you with a sense of progression or a reduction in the number of loans you have.

Can cause you to get further into debt as you “clear” the credit cards you may then revert to using them again. (CUT THEM UP!!!!!!!)

Ultimately it comes down to this:

Why are you doing it?

If you are doing it in order to feel like you are doing something to tackle your debt, don’t bother.  The reality is that unless you start actively overpaying in order to bring down your debt you will simply move the debt somewhere else.  You have not achieved anything.  You may save £300 a year here or there but when you are tackling a £25,000 problem, that really does nothing.  You need to start working extra and paying £300 a MONTH towards reducing it.

If, on the other hand, you are in complete control of your money and you are consolidating because it allows you to reduce the term of your loan or drastically decrease the interest costs associated with your loan, then do it, on the proviso that those interest savings are then paid back into the loan, thereby reducing the term even sooner in order to get you out of debt quicker.

Hope this helps,

J.A.Scott

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