Consolidating debts is an appropriate action for many debtors, but certainly not all. We answer the question you may not have even thought to ask...
'I'm consolidating my position!' I snapped defensively, when plagued by the vultures. They were circling me over the Monopoly board whilst I was mortgaging all my properties, having landed on a hotel on Coventry Street, and me without a single set. Not even the browns.
So consolidating isn't always good. Not if it means you're having your butt kicked. If you're not careful, this is exactly what'll happen to you when you get a consolidation loan.
Consolidation loans aren't a particular type of loan, like unsecured loans are, for example. You can get any sort of loan to consolidate your debts. It might be an unsecured loan, a secured loan or a credit card, or you could remortgage. The nub is that if you're doing it to bring all your debts together, then it's a consolidation loan.
Usually, however, when you talk about consolidation loans (or, at least, when you see them advertised on TV again and again as a no-lose wonder cure) they are secured loans. Us writers here at The Motley Fool are very wary of secured loans, because for the majority there is a cheaper, more flexible, and/or more suitable way.
If you're considering getting a secured loan, put your position to the great people on our Dealing with Debt discussion board first. They might help you come up with a better alternative.
Most people will look at consolidating their debts when their monthly outgoings are too high: they do it to make their monthly bills more affordable. Ideally, you want to consolidate if:
- By doing so the total amount you pay over the life of all your debts will go down (i.e. you'll pay less interest by the end).
- The monthly debt payment comes down.
But you should beware of some important points:
- The biggest potential downside is that you can end up taking on even more debt. Old Fool research showed that five out of six people who take out consolidation loans went on to take on further debt. We conducted yet more research in April. It was just a small sample (about 200), but the results showed that 60% ran up further debts after consolidating. More than half of those who consolidated their debts also recommended against others taking out consolidation loans!
- Consolidating debt is not necessarily cheaper. You may do a lot better to snowball your debts.
- Consolidation loans are usually spread out over a longer period, so the monthly payments might be more affordable, but you'll be in debt for longer and pay more interest in the long run. Before getting a lengthier loan, you should try to reduce your outgoings.
- Loans used for consolidation often lack flexibility: you may not be able to overpay without penalty, so it's more expensive to get out of debt earlier...on the flipside, if you're undisciplined, you might not want your loan to be flexible, so that you're unable to keep borrowing more.
- Like all loans, you will be cross-sold payment protection insurance. We strongly urge you to consider alternatives to this very expensive cover, with its many exclusions.
So, think hard before consolidating your debts. You must be ready to stop overspending and to live within your means. If you fail, the vultures that plague you might be of the worst kind.
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> Read our guide: How To Get Out Of Debt.