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Should I consolidate my debt with a loan or do a debt management plan? 24 September 2010
Steven Jackson (about the author)

If you are having difficulty with your debt repayments you may be thinking of taking a consolidation loan. We consider whether this is a good idea or not.

Generally speaking the first thing that you consider if you are struggling to pay your debt is the option of getting a consolidation loan.

A consolidation loan can be used to pay off a number of smaller debts and reduce your monthly payments.

It is also likely that the interest you are charged for a consolidation loan is going to be less than that which is being added to your store and credit card accounts.

Consolidation pitfalls

However, despite the advantages of consolidation, there are a number of pitfalls with consolidation which you need to be aware of.

The first problem is you may find it difficult to get a consolidation loan. If you have any credit rating problems because of missed payments in the past, this could be enough to prevent you from being able to borrow.

The next thing to consider is that consolidation will only work if all of your old debts are paid in full. If they are not because you cannot borrow enough, you will be left with both the new loan payment and some additional monthly payments which may still be difficult to manage.

You must also make sure the new consolidation loan payment is affordable.

You should review your income and expenditure budget and make sure that you can afford the monthly loan payment. If not, then you will still be forced to supplement your income by using your overdraft and credit card each month and your debts will continue to get worse.

The debt management plan alternative

Because of the issues of a consolidation loan to manage a debt problem, it is also sensible to consider the option of a debt management plan.

A debt management plan does not involve borrowing more money. Instead it is an agreement with all of your creditors to reduce the amount you pay to them each month to fit within the budget you can afford.

The advantage of a debt management plan is that it gets you back in control of your payments and means that you no longer have to keep borrowing more each month to cover all of your expenditures.

However, there are of course disadvantages with a debt management plan solution.

The first is that your credit rating will be affected. After starting a debt management plan you will find it much more difficult to get credit or do things like change your mortgage in the future.

It may also take a very long time to pay off your debt using debt management. You still owe all of the money and paying at a reduced rate each month can only serve to extend your payment period.

If you find that you are unable to pay your debts, a consolidation loan could be a perfect solution as long as all of your debt is paid off and you can afford the new monthly payments.

If this is not the case, then consolidation should be avoided and an alternative such as a debt management plan considered.

If you are struggling with debt, visit www.beatmydebt.com

Our vibrant forum gives free access to industry experts and others who have suffered with debt problems.

Useful guides, calculators and information are also available designed to help you understand how to manage and resolve debt problems.

Source: Beat My Debt