Are debt consolidation loans a good idea?

If you're tired of juggling various credit cards, loan repayments and overdrafts; a debt consolidation loan answer might be the answer. By bringing all your financial commitments beneath a single umbrella; you can reduce overall monthly repayments, get the creditors off your back and raise additional capital.

Debt consolidation loans work by extending the overall term of your borrowing; which means lower monthly payments over a longer period of time. Great news if you've got expensive debts. With typical credit card APRs at around 15%; minimum monthly payments often just cover the interest and don't repay the loan. With a debt consolidation loan; every payment works towards clearing the capital borrowed and you know exactly when loan will be repaid. Besides saving you money and making your life easier; debt consolidation will also prevent further damage to your credit record.

However, it's important to understand that you are refinancing your borrowing over a greater period of time. Circumstances vary from person to person, but it could mean that you are paying more in the long-run. The trick is to do as much homework as possible before making a decision. A responsible broker will talk you through all the angles or you can speak to an Independent Financial Advisor.

Another potential pitfall is that you don't use your loan wisely. Bad habits are often the hardest to break, and because most consolidation loans don't stipulate that you must first repay existing loans; you'll have to resist the temptation to keep on spending. Similarly if you do clear outstanding credit and store card debts; don't use this as an excuse to go shopping. Instead seriously consider throwing away all your plastic.

If you are considering a debt consolidation loan; make sure that you use it as a way to solve your financial problems and not just to buy you breathing space.