Advantages and disadvantages of debt consolidation loans

• One single payment means much less to worry about.

• The combined payment on a debt consolidation loan is usually much lower than the sum of all your other payments.

• One loan at one interest rate is usually cheaper than several loans, overdrafts, multiple credit cards and hire purchase agreements all at different interest rates. In effect, you are buying credit in bulk, and therefore getting a “quantity discount”.

• You can usually borrow a little extra for other needs (be extremely careful with a this one, it can easily end up as a disadvantage).
  

• The lower monthly payment means that you will be taking many more years to repay the loan. This is especially the case for secured personal loans, which can have repayment periods of up to 25 years, whereas unsecured loans tend to only last for five years.

• The longer borrowing period means that you end up paying more interest over time.

• Although the interest rate will be lower than most other forms of borrowing, if you have balance transfer deals on your credit cards, you may end up paying more by rolling this into a debt consolidation loan.

• The option of borrowing a little bit more to “reward yourself” with a new car or holidays usually means that you are adding significantly to your debt burden. This is why we advise taking extreme caution in this area.

• Taking out a new loan with a different bank often means that your existing credit cards, overdrafts and loan stay accounts open [more on this].

• Reduced monthly outgoings can encourage more spending. See an example of how it can work for you.